Central bank keeps key rate unchanged

The Jakarta Post ,  Jakarta   |  Tue, 10/09/2007 8:35 AM

Urip Hudiono, The Jakarta Post, Jakarta

The central bank has held its benchmark interest rate unchanged once again at 8.25 percent, citing rising inflationary expectations ahead and uncertainties on the global financial markets.

Bank Indonesia said it believed the current rate was high enough to keep inflation in check within its 5 to 7 percent estimate for the year, while still being low enough to spur growth in the third quarter and beyond at 6.2 percent on lower borrowing costs and higher spending.

""This decision is intended to consolidate the credibility we have gained so far in maintaining macroeconomic stability so as to support economic expansion,"" BI Senior Deputy Governor Miranda S. Goeltom said after Monday's monthly policy meeting of the central bank's Board of Governors.

This marks the third consecutive time since July, when inflation first picked up this year, that BI has held its rate steady. Before that, the central bank, starting May last year, had trimmed the rate by 450 basis points from 12.75 percent.

BI said that the upward trend affecting both headline and core inflation had continued during the third quarter, with the figures for September being 6.95 percent and 6.03 percent year-on-year, respectively, due to the Ramadhan fasting month and upcoming Idul Fitri holidays. As a result, the central bank would have to particularly ""monitor the situation"" in relation to its rate policy.

BI also referred to the lingering effects of the U.S. subprime mortgage crisis, which had caused increased capital outflows from the local financial markets, pushing down the rupiah.

""Looking ahead, uncertainties regarding the adjustment of the global financial markets to the subprime mortgage crisis means that we have to continue to be consistent with our prudent monetary policies,"" Miranda said.

The problems on the global markets appear to have subsided for now -- with capital flowing in and the rupiah strengthening once again. If this were to continue, along with easing inflation, the central bank says it continues to see room for further rate cuts ahead.

""The BI rate at 8.25 percent will be enough to stimulate growth ahead, as it still leaves room for the banks to lower their own lending rates,"" Miranda said.

Miranda said that BI expected inflation to ease to between 4 and 6 percent next year, while growth was expected to be ""the same or better"" than the third quarter's expected 6.2 percent.

BI's decision to hold the rate steady Monday had been widely expected by analysts.

Economist Ryan Kiryanto of Bank Negara Indonesia said BI had thoroughly assessed the situation, and the current rate level was sufficient to anticipate a possible weakening of the rupiah due to higher corporate demand for dollars ahead for debt repayments.

""And if global rates continue to ease, then BI can also cut rates again, by November at the latest, to 8 percent by December,"" he said.

Local markets were also unaffected by BI's decision to keep its rate on hold, having already factored it in, and instead rallied on the back of global sentiment and the prospects of strong third-quarter corporate performances.

The Jakarta Stock Exchange Composite Index was up 23.12 points to 2,523.70, while the rupiah was slightly stronger by 0.1 percent at Rp 9,075 against the U.S. dollar.

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