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Indonesia holds rates to support rupiah

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November 7, 2008

Indonesia holds rates to support rupiah
Indonesia's central bank kept interest rates on hold on Thursday in an effort to shore up its currency despite lower October inflation, while the government cut gasoline prices to try to support economic growth, reported Reuters.

Several big central banks have cut rates in recent weeks in response to the global financial crisis, and analysts see room for Bank Indonesia (BI) to follow suit, easing in January as inflationary pressures subside.

With the BI rate BIPG kept at 9.5 percent, Indonesia offers a healthy 8.5 percentage-point premium over the US fed funds rate, which analysts said should help maintain confidence in Southeast Asia's biggest economy.

"The central bank's inaction made clear one thing: between a falling rupiah and growth risks, BI has chosen to address the former rather than the latter," said Joanna Tan, Singapore-based economist at Forecast. The rupiah fell nearly 13 percent against the dollar in October.

"That said, it will be hard for BI to ignore the plethora of rate cuts in the global community," she said, adding that she expects the central bank to begin cutting rates in early 2009.

The prospects for a rate cut were boosted by a finance ministry announcement that subsidised gasoline prices would be cut about 8 percent following a sharp fall in world oil prices.

With elections due next year, the government has come under increasing pressure to cut fuel prices in response to the steep decline in global oil prices. The move could ease inflationary pressures and reduce the drag on economic growth.

Central banks around the world are rapidly cutting interest rates against a bleak economic backdrop and comes ahead of expected interest rate cuts by the European Central Bank and the Bank of England Thursday and after rate cuts in the United States, China, Japan and Australia.

Indonesia's economy has grown at an average of about 6 percent on a quarterly basis since the end of 2006. The government is targeting growth of 6.4 percent for 2008, despite the global credit crisis, in order to reduce poverty and unemployment as the country heads for elections next year.

But Bank Indonesia's Deputy Governor Hartadi Sarwono said on Wednesday that it would be tough to grow above 6 percent next year given global economic conditions.

The central bank has raised its key interest rate six times this year, from 8.00 percent to 9.5 percent, to try to curb inflationary pressures due to high food and energy prices.

Indonesia's annual inflation, however, eased in October to 11.77 percent from a two-year high of 12.14 percent in September as food price pressures lessened on the back of a fall in global commodity prices.

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