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August 6, 2008

Indonesia central bank raises key rate to 9%
Indonesia’s central bank on Tuesday decided to hike its key overnight rate by 25 basis points for the fourth time this year in an effort to gradually tighten its control of double-digit inflation, reported Reuters.

Markets had widely anticipated the move, which brought the overnight policy rate to 9.0 percent BIPG, after annual inflation in July spiked to a near two-year high of 11.9 percent.

But economists said inflation in Southeast Asia’s biggest economy may have either peaked or was close to peaking and predicted only moderate further policy tightening of up to 50 basis points.

Bank Indonesia said it would use all its monetary tools to bring inflation under control, fuelling speculation it may opt for a mix of rate tightening and other measures, such as an increase in banks’ required reserves.
With parliamentary and presidential elections due next year, the government is keen to maintain economic growth, which last year reached 6.3 percent, the highest expansion since 1996, and the central bank played down any potential negative impact of Tuesday’s rate rise.

“BI expects the 25 basis points increase ... will not hurt economic activity in Indonesia,” it said in a statement. “Various indicators show that local demand is still strong.”

The central bank did not specify which monetary tools it would use or comment on the reserve requirements for banks but it said it would continue to control the exchange rate volatility and mop up excess funds via open market operations to make its policy more effective and allow it to hit its end-2009 inflation target of 6.5-7.5 percent.

Indonesia’s inflation spiked to double digits after a hike in regulated fuel prices in May and the central bank forecast it will stay high in months ahead, hitting 11.5-12.5 percent at the end of the year, before returning to single digits next year.

Indonesia’s central bank, like other central banks in Asia, is trying to contain inflation, largely stoked by a surge in oil and commodity prices, without hurting economic growth at a time when the global economy is cooling.

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