Indo central bank holds on rate increase

Indonesia’s central bank prefers not to raise rates, in case it needs to counter a spike in fuel prices or a bubble in auto loans next year, analysts said.

The economy is set to grow by 6 percent in 2011, a figure that may increase by 2012.

But Bank Indonesia (BI) has raised rates just once since cutting them to a record low in 2009, instead countering inflation by allowing the rupiah to rise to seven-year highs and working with the government to ease food price pressures.

“As long as other policies can be effective, we will use other policies,” Bank Indonesia’s Governor Darmin Nasution, 62, said on Thursday.

Other Asian central banks have embarked on rate increases, but these have been slowed by a recent United States pledge to keep interest rates low until 2013 and a faltering global economy.

Indonesian inflation has dropped in recent months to less than 5 percent but may climb above the central bank’s target to a “tolerable” 6.1 percent next year if the government raises subsidized fuel prices, Nasution said.

BI has held its benchmark overnight policy rate at 6.75 percent since a surprise hike in February, and economists have now pushed back their forecasts for further rises to 2012.

The central bank has an inflation target of 3.5 to 5.5 percent for 2012, with uncertainty over the government’s policies on fuel prices having been seen as the main risk to BI’s 4 to 6 percent inflation target for this year.

Comments by Nasution, who said inflation was likely to be lower in the coming months, come as some economists speculate BI could even leave rates on hold for all of next year in Southeast Asia’s biggest economy.

However, any rise in oil prices could again pressure the state budget, with the government forecasting the 2011 deficit could widen to 2.1 percent of GDP, still enviable by global standards. But spending on fuel subsidies is a habit economists and rating agencies say the government needs to wean itself off.