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NEWS UPDATES Asean Affairs        10  June 2011

Bank Indonesia holds rate -for now

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While Bank Indonesia made the expected move to keep its key interest rate at 6.75 percent, analysts said they still expected it to raise its rate in the third quarter.

In the past few months, Bank Indonesia has sent signals of a possible rate hike in anticipation of price pressures. However, it held off from raising borrowing costs since its first rate increase in more than two years in February, a rise of 25 basis points.

"BI does not even talk hawkish any more, much less act the part. A chili-flavored base effect would likely dampen headline inflation in the coming months and form a key risk to our call for July rate hike," said Wellian Wiranto, an economist at HSBC in Singapore.

The central bank cited easing inflation and a strengthening rupiah on Thursday as it kept its rate steady for the fourth successive month.

It said the trend for the rupiah's appreciation was "in line with Bank Indonesia's intention to contain inflationary pressures, especially from imported inflation." The appreciation was still in line with gains in other regional currencies and would not hurt Indonesia's exports, it said.

The rupiah, which strengthened 0.33 percent in May, has advanced 5.8 percent against the US dollar in the past six months, second-best among Asia's 10 most-traded currencies excluding the yen. It touched 8,499 on Wednesday, its strongest level since March 2004.

Bank Indonesia said core inflation could rise in the coming months. It said it would "remain cautious over factors that may further push up core and headline inflation," specifically mentioning government policies on fuel and electricity subsidies."

Consumer prices rose 5.98 percent in May from a year earlier, the Central Statistics Agency (BPS) said on Wednesday, down from a 6.16 percent gain in April. Core inflation rose 4.6 percent last month, the same pace reported in April.

Enrico Tanuwidjaja, an economist at OSK-DMG Group in Singapore, said Bank Indonesia would raise its rate by a half point to 7.25 percent in the third quarter.

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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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