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NEWS UPDATES Asean Affairs        12 January 2011

Bank Indonesia delays on rate increase

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With the specter of inflation hovering over Indonesia, calls for the central bank to raise interest rates sooner rather than later are growing increasingly loud.

Higher food prices and rising inflation have sent the stock market tumbling and the rupiah to its lowest level in almost seven months.

The government has already expressed concern over rising food prices by acting to mitigate further increases. Inflation hit 6.96 percent last month from a year earlier.

"There is concern in the market that Bank Indonesia is behind the curve on raising interest rates," said Harry Su, senior vice president and head of research at Bahana Securities.

"Prior to the December inflation numbers, the consensus was that interest rates would rise by 50 basis points by the end of the year, but now the market is anticipating a hike as early as next month."

Market analysts and economists anticipate the central bank will have to raise interest rates by as much as 100 basis points by the end of the year to tame inflation.

The International Monetary Fund also joined the chorus of calls for BI to raise interest rates.

"The jump in domestic food prices in the past two months is of concern," Milan Zavadjil, the IMF's senior resident representative for Indonesia, recently wrote.

"Unless reversed in the upcoming crop season, BI will need to act to prevent pass-through to non-food prices. Strong growth and double-digit wage awards suggest core inflation is set to pick up."

Bank Indonesia kept its policy rate at a record-low 6.5 percent on Jan. 5, even as consumer prices rose at the fastest pace in 20 months in December.

Rather than raise interest rates, BI has allowed the rupiah to appreciate and required banks to raise their reserve rate to control inflation.

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It is commonplace in journalism to write two types of articles at the transition point between the year that has passed and the New Year. As this writer qualifies as an “old hand” in observing Thailand with a track record dating back 14 years, it is time take a shot at what may unfold in Thailand in 2011.

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