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NEWS UPDATES Asean Affairs           12  July 2011

Bank Indonesia expected to hold interest rate

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Indonesia's central bank is likely to keep its key benchmark rate unchanged today as stable inflation and a strong rupiah allows it to continue to support economic growth.

According to a poll of nine economists surveyed by the Jakarta Globe, Bank Indonesia will probably leave its key interest rate unchanged at 6.75 percent when its board of governors convenes today.

The Central Statistics Agency (BPS) announced this month that the annualized inflation rate slowed in June to 5.54 percent - the lowest in a year - from 5.98 percent in May, as chili prices eased. Chili prices soared last year because severe weather disrupted harvests and hurt domestic supplies.

The rate is still within the central bank's 2011 target range of 4 percent to 6 percent. Core inflation, which excludes volatile food and fuel prices, was 4.63 percent year-on-year in June, little changed from May.

"The headline inflation was much lower in June and the core inflation was stable, it is very likely that the central bank will keep the policy rate at 6.75 percent," said Destry Damayanti, an economist at Mandiri Sekuritas.

The rupiah may continue to gain for the rest of the year, thanks to steady capital inflows. The rupiah, which has risen 5.2 percent this year, last traded at 8,524 against the dollar in Jakarta.

"As inflation slowed and the rupiah appreciated, there's no reason for BI to increase the benchmark rate,'' said Juniman, chief economist at Bank Internasional Indonesia in Jakarta. "Bank Indonesia will likely keep the interest rate until the end of the first quarter next year."

Indonesia's steady monetary policy is in contrast with neighboring countries, where a pick-up in consumer prices has pushed central banks in China and the Philippines to become more vigilant in their fight against inflation. China's central bank last week raised its rates for the third time this year, and further tightening may be warranted after a report showed that inflation in June quickened to a three-year high.

With inflation steady at home, Bank Indonesia can focus on expanding the economy.

Last week, the Finance Ministry raised its economic growth target to as much as 7 percent for next year, citing stable inflation and expected spending increases with its latest development program. The economy is expected to grow 6.5 percent this year after expanding 6.1 percent in 2010.

A recent survey on consumer confidence reinforced those views. Danareksa Research Institute reported last week that its Consumer Confidence Index for June was at the highest level in almost two years, as Indonesians felt secure about the stability of food prices and the country's economic well-being. The index hit 91.8 points in June, up 1.2 points from one month prior.

Bank Indonesia's governor, Darmin Nasution, said he expected that inflation would stay in the bank's target range of 4 percent to 6 percent this year. Inflation pressure tends to increase approaching Ramadan, which is expected to begin next month.


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