The central bank raised its interest rate Thursday for the fifth straight month, a move analysts believe may undermine the corporate sector amid signs the economy is running out of steam.
Central bank governor Boediono and his colleagues raised the benchmark interest rate by 25 basis points to 9.25 percent on concern robust domestic demand will accelerate inflation.
"Inflationary pressures on the domestic market remain strong, particularly due to the result of higher demand."
"While pressures from higher global energy, food and commodity prices have temporarily declined, there is a need for us to be alert," Bank Indonesia Governor Boediono said in a statement.
Analysts have said higher interest rates are needed to help cushion accelerating inflation during the Islamic fasting month of Ramadan this month and Idul Fitri holiday in early October.
During the period, spending on food and gifts typically soars.
The government has pledged to try to keep inflation below 0.8 percent in September -- as was the case during the fasting month last year -- by improving the flow of goods and by releasing stockpiles of staple foods.
The government expects full-year inflation to reach 11.2 percent. However, analysts say inflation may end up at between 11.5 and 12.5 percent at the end of the year.
An accurate monetary policy is expected to bring inflation to between 6.5 percent and 7.5 percent in 2009.
The Central Statistics Agency (BPS) revealed recently that from January to August this year, inflation reached 9.4 percent, with August pressure easing to 0.51 percent -- the lowest so far this year.
Chairman of the Indonesian Chamber of Commerce and Industry (Kadin) Mohamad S. Hidayat said the rising inflation rate had reached a level the corporate sector could no longer endure.
He said a higher lending rate would increase borrowing costs and dent company expansion plans and dissuade investors from starting new business. Robust corporate activities are needed to reduce unemployment, he added.
Kadin has said the private sector will not be able to endure interest rates of higher than 9.5 percent.
Bank Negara Indonesia economist Ryan Kiryanto said BI might raise the rate again next month should inflation remain above 1 percent, meaning the rate could reach 9.50 or 9.75 percent by the end of the year.
According to Ryan, higher interest rates will also hurt the banking sector as demand for loans will decrease.
Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said he was surprised at the rate raise because the economy is slowing and liquidity is tight in the banking sector.
"BI should not have raised its rate. But perhaps BI raises the rate to protect the weakening rupiah (against the U.S. dollar)," Purbaya said, adding that businesses would not be able to expand unless BI kept the interest rate below 9.5 percent.
According to Citigroup, BI is likely to raise the rate by another 25 basis points in October to 9.5 percent.
