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NEWS UPDATES 3 October 2009

Indonesia central bank may keep rate as inflation accelerates

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Indonesia central bank is expected to maintain its benchmark rate as commodity prices accelerated in September due to higher demand in the fasting month and Idul Fitri holiday, the Jakarta Post reported, quoting figures from the Central Statistics Agency (BPS).

The BPS announced Thursday that August’s exports had reached $10.55 billion, surpassing $10 billion for the first time since October last year, as Indonesia’s major trading partners experienced economic recovery.

September saw an inflation of 1.05 percent from a month earlier, BPS head Rusman Heriawan said in a press conference Thursday.

“Nearing the Idul Fitri holiday, prices showed an increasing trend.”

Year-on-year inflation in September rose 2.83 percent from a year earlier. In the first nine months this year, inflation reached 2.28 percent.

BI senior deputy governor Darmin Nasution said full-year inflation this year will likely be less than 4 percent.

Eric Sugandi, an economist at Standard Chartered Bank, said inflation was still within a moderate level, and BI would hold its rate at 6.5 percent to help spur growth.

“My opinion is that 6.5 percent is already the right level for the BI rate, given that the central bank should now pay more attention to accelerating inflation.

“With respect to the interest rate, what economy now needs is accelerating credit expansion by commercial banks.”

He added another BI rate cut this year would not be effective in bringing lending interest rates down due to several factors, including the high risk premium charged by banks to borrowers; the relatively high cost of funds for the overall banking industry; and the still profitable move by banks in placing their money in government bonds.

Fourteen major banks have agreed to lower deposit rates to as much as 150 basis points above the BI rate, and further cut the rates to 50 points above the BI rate three months from Aug. 20.

Eric said bank lending growth would improve in the coming months, although it would be much lower than last year as banks’ concern over the economic slowdown has eased, meaning they can start lowering the risk premium charged to borrowers.

City analyst Johanna Chua said BI would likely keep its rate at 6.5 percent when the board of governors met Monday, adding that Indonesia would see the first BI rate hike in the second quarter of 2010.

Eric said BI would raise its rate up to 7.5 percent next year.

August’s exports rose 8.89 percent from a month earlier, despite continuing to suffer a 15.41 percent decline on a year-to-year basis.

“Exports will likely continue improving in the next four months,” Rusman said. The report also shows that Indonesia had a trade surplus of $1.25 billion in August, after importing $9.3 billion in goods and services.


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