BI holds benchmark rate steady at 8.25%

The Jakarta Post ,  Jakarta   |  Wed, 08/08/2007 12:50 PM

Urip Hudiono, The Jakarta Post, Jakarta

The central bank has put a halt on its recent rate cuts, anticipating more inflation and risks to the rupiah from current jitters in the global market.

Bank Indonesia's (BI) Board of Governors decided in its monthly policy meeting Tuesday to keep its benchmark interest rate at 8.25 percent, a level deemed level appropriate for promoting more bank lending.

The rate hold is also aimed at helping the economy continue expanding by 6.2 percent this year and 6.5 percent by 2008.

Although BI believes inflation can still be maintained within the 5 to 7 percent range, recent volatility in financial markets worldwide has been a major consideration for its latest policy decision.

""BI will closely monitor developments to do with this situation and anticipate any potential effects on the inflation target and growth momentum,"" the Board said in a statement after the meeting.

""BI will also continue to keep a close watch on global risks which could affect the stability of the macroeconomy and the financial sector. Capital flows dominated by short-term portfolio investments are among such risks.""

The central bank has been trimming its BI rate since May last year from 12.75 percent, only pausing twice in June last year and April this year on inflation uptick trends. Inflation rose to 6.06 percent in July, from 5.77 percent in June.

Analysts welcomed BI's latest decision, saying it had fulfilled market expectations by maintaining a balance not only between inflation concerns and growth prospects, but also taking into account investor confidence in the rupiah and assets based on the currency.

Local shares and the rupiah have recently been under pressure from global market wobbles caused by uncertainty over U.S. subprime loans. The rupiah weakened to an average of Rp 9,215 to the U.S. dollar in July, down from Rp 9,035 in June.

""Holding the BI rate is in line with inflation trend expectations and keeping the rupiah attractive,"" Standard Chartered Indonesia chief economist Fauzi Ichsan told The Jakarta Post. ""A weaker rupiah could fuel imported inflation, particularly when many goods still have imported contents of between 60 and 70 percent. BI can still cut rates later on, but perhaps more carefully.""

BNI senior economist Ryan Kiryanto said holding the BI rate was appropriate in light of continued rising inflation expected for August.

He said the 8.25 percent rate was enough to keep rupiah-based assets attractive in comparison to U.S. assets.

The U.S. Federal Reserve's key rate is currently 5.25 percent.

The Jakarta Stock Exchange Composite Index closed 0.7 percent lower Tuesday to 2,174.07 points, little affected by the BI rate policy and still moving mostly on global market concerns and the U.S. Federal Reserve's coming policy. The rupiah also closed slightly weaker at Rp 9,330 a dollar from Monday's Rp 9,295.

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