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September 5, 2008

Indonesian central bank increases rates for the 5th time
Indonesia's central bank raised interest rates on Thursday for the fifth time this year to combat double-digit inflation, but analysts say it may be the last increase in 2008 as price pressures have probably peaked, reported Reuters.

Bank Indonesia's decision to boost its overnight rate by 25 basis points to 9.25 percent was in line with expectations so didn't impact financial markets.

Analysts believe a global round of policy tightening may be coming to an end as slower growth in major economies becomes a bigger worry than inflation.

They said they expected Bank Indonesia to keep rates steady now and then start cutting them next year, a view they said was reinforced by the central bank's comment on Thursday that "it is necessary to keep demand growth on the right track."

Indonesia's annual inflation rate dipped in August for the first time in seven months, suggesting that price pressures had peaked.

"Going forward, the chances of rate hikes should diminish as inflation takes a backseat to growth concerns. We expect the central bank to hold the rate at 9.25 percent until the end of the year," said Singpore-based economist Joanna Tan of Forecast Pte Ltd.

The rate decision came after the central bank's governor, Boediono, told Reuters in an interview at the weekend he would do "whatever it takes" to bring annual inflation below 10 percent in 2009, an election year.

Inflation is currently running at just below 12 percent but the governor said told parliament on Tuesday inflation may fall below 6.5 percent by the end of 2009.

Analysts said inflation may have peaked but price pressures would remain high due to steady demand, especially for food ahead of the Eid al-Fitr Muslim celebrations in early October, which marks the end of the Muslim fasting month of Ramadan.

Southeast Asia's biggest economy grew in the second quarter by a stronger-than-expected 6.39 percent from a year earlier, thanks to strong commodity exports and investment.

Indonesia's 6.3 percent GDP growth in 2007 was the fastest pace in more than a decade.

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