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NEWS UPDATES Asean Affairs        15 January 2011

Indonesia set to raise rates

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Market pressures are forcing, to raise interest rates for the first time since 2009 to tame rising inflation, the bank's governor said.

"The direction is to raise rates but it will depend on inflation," Bank Indonesia Governor Darmin Nasution told reporters on Friday. "BI is ready to find the appropriate time to increase the BI rate."

Investors and market players have been urging the central bank to adopt a tighter monetary stance, including by raising its benchmark interest rate which had been kept stagnant at a record low of 6.5 percent for the past 18 months.

"Inflationary pressures will continue to pick up and will affect core inflation," Nasution added. However, he said he was confident the government would take appropriate measures to contain prices of commodities such as rice.

Food prices have risen sharply since December and economists have warned that headline inflation would translate into core inflation if the central bank did not act urgently. Both the International Monetary Fund and the World Bank also said this week that inflation and capital flight were serious threats to the economy.

Inflation hit a 20-month high in December, adding to investors' concerns that BI's dovish stance may leave it too far behind the curve in tamping down price pressures.

Darmin's comments were echoed by Diffy A. Johansyah, BI's head of public relations, in a telephone interview with the Jakarta Globe.

"Bank Indonesia is ready to raise interest rates if inflation starts to build up," Diffy said. However, he added the central bank has not decided on when and by how much it would raise the rate.

"We still have to calculate how much we shall raise it according to the policy mix," he said. "All monetary instruments should be evaluated and weighed so they will be balanced and not negatively affect each other."

Core inflation, inflation figures excluding volatile items such as food, which is used by the central bank as the benchmark to raise interest rates, stood at 4.28 percent in December. Central Bank officials said that the danger threshold began at 5.0 percent.

Fauzi Ichsan, an economist at Standard Chartered, said earlier this week that food inflation could translate into core inflation as high food prices affect prices of other goods that are included in the core inflation.

"Food inflation could translate into core inflation within three months. BI should raise the interest rate by 100 basis points to 7.5 percent," he said.

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