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IMF suggests Indonesia raise interest rates
The International Monetary Fund recommends that Indonesia should consider raising interest rates further to contain inflation, reported Reuters from Washington on Tuesday.

In its annual economic review, the IMF said Indonesian authorities should also strengthen the country’s inflation-targeting framework by publishing inflation forecasts and committing to medium-term inflation targets, reported Reuters.

Headline inflation in Indonesia, Southeast Asia’s largest economy, climbed to 11.0 percent by the end of June, and core inflation reached 8.7 percent in May, above the central bank’s 4 to 6 percent target range for end-2008.

After lowering interest rates to 8 percent and then holding them unchanged since late 2007, the central bank hiked rates three times since May by a total of 75 basis points. Still, the real policy interest rate calculated on the basis of core inflation has declined over the year and is now around zero.

Overall, the IMF said the Indonesian economy has been relatively unscathed by turbulent global market conditions and the fallout of the U.S. subprime mortgage crisis.

It forecast Indonesian annual growth would ease to 6.1 percent in 2008 and return to 6.3 percent next year, the same level as in 2007 and the highest growth rate in a decade.

The fund said strong domestic demand and higher commodity prices have helped Indonesia maintain a strong pace of growth. The country exports large volumes of palm oil, rubber and cocoa.

Still, the IMF cautioned that surging fuel subsidies, which increased to one-third of total current spending, and rising inflation were a concern.

It said IMF staff estimated Indonesia’s rupiah currency was “moderately undervalued.”
“(IMF) directors welcomed the new policy of increased reselling of oil receipts, which should help strengthen the currency and support monetary policy in dampening inflationary pressures,” the fund said.

While currency reserve levels were broadly adequate, they may need to be increased over the medium term to further reduce economic vulnerabilities, the IMF added.

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