BI ups interest rate to 8.75% on concerns over high inflation

Aditya Suharmoko , The Jakarta Post , Jakarta | Fri, 07/04/2008 11:07 AM | Headlines

The central bank on Thursday raised its benchmark interest rate by 25 basis points to 8.75 percent on concerns over high inflationary pressures.

"Bank Indonesia (BI) sees the need to raise BI rates to cushion the impact of rising fuel prices and food commodities on other products," BI Governor Boediono told a press conference.

"Inflationary pressures in 2008 are mainly coming from the rise in fuel prices and food commodities. However, BI also sees an increase in the demand side, with growing bank lending and high liquidity until the first semester of 2008," he said.

Inflation in June rose 11.03 percent from a year earlier due to the impact from the fuel prices increase, the Central Statistics Agency (BPS) reported. Between January and June, inflation reached 7.37 percent, as compared to 2.08 percent in the same period last year.

The government raised fuel prices by an average 28.7 percent on May 24, triggering higher transportation costs and food prices.

Boediono said that in determining the BI rate increase, the bank had considered a change of base year inflation, which the BPS used to determine inflation in June.

The BPS changed from using 2002 as the base year to 2007, which it says is more representative of the current economic conditions.

With the move, the agency increased the number of surveyed cities from 45 to 66 and food products from 744 to 774, while reducing the weight of foodstuffs from 43.38 percent to 36.12 percent.

BI deputy governor Hartadi said BI would watch for second-round effects of the fuel prices hike, despite also saying the impact "fully materialized in June".

The 25 basis points increase was in line with most economists' predictions.

Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said the move indicated that BI wanted to cushion inflationary pressures while maintaining economic growth.

"As long as BI keeps its rate below 9.5 percent, the economy will grow. BI needed to raise its rate to signal to the market that it wanted to curb rising inflation expectations," Purbaya said.

He predicted BI would raise its rate to 9 percent in the coming months and maintain it until the end of 2008.

BI said its foreign exchange reserves in June stood at US$59.45 billion, up from $57.46 billion in May, a change that should positively impact the rupiah.

Also at the conference, BI said bank lending in May grew by 31.4 percent, far above BI's expectation of between 22 percent and 24 percent.

The rate of net non-performing loans (NPLs), meanwhile, dropped from 1.83 percent in April to 1.78 percent in May.

BI deputy governor Muliaman D. Hadad said most of the loans were disbursed as working capital and investment loans to productive sectors.

"Working capital and investment loans account for 70 percent of total lending," Muliaman said.

He expected banks could maintain their lending quality throughout the year. Purbaya said bank lending was expected to grow by 30 percent this year if BI maintained its rate below 9.5 percent.

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