After six increases this year, the central bank maintained its key interest rate at 9
After six increases this year, the central bank maintained its key interest rate at 9.5 percent Thursday to provide room for the economy to grow, while keeping the rupiah attractive to avoid a further slide.
In a statement, Bank Indonesia (BI) said it wanted to balance economic growth with its attempt to control monetary stability. BI raised its rate by 25 basis points in six straight months from 8 percent in May to 9.5 percent in October.
BI deputy governor Hartadi A. Sarwono said BI's decision took easing inflation and a slowing global economy into consideration.
"We will see inflation slow down even though it is currently at a high level due to the high base year-on-year level. Meanwhile, the slowing global economy will impact domestic economic growth," he said after a meeting with Finance Minister Sri Mulyani Indrawati.
Monthly inflation stood at 0.45 percent in October, the lowest monthly rate recorded this year, bringing October's year-on-year rate to 11.77 percent, down from 12.14 percent in September.
BI expects inflation to hover between 11.5 percent and 12.5 percent by the year's end, and drop to between 6.5 percent and 7.5 percent in 2009.
"What we need to monitor intensively is the impact of (rupiah) depreciation on inflation. However, we estimate the pass-through effect on the exchange rate will not be too big as we adjust to the new condition," he added.
The rupiah has been on shaky footing over the past month, as demand for U.S. dollars remains high amid the global credit crunch and investors abandoning assets in emerging markets, putting more pressure on the local currency.
The rupiah fell 1.1 percent to 11,050 per dollar as of 4:32 p.m. in Jakarta on Thursday, compared with 10,925 Wednesday, according to data compiled by Bloomberg.
With the interest rate kept at 9.5 percent, it is expected the rupiah will remain attractive to investors compared to the United States standing at a broad 8.5 percent.
"BI rate has an impact on several aims. We decided to keep the rate to balance all aims," BI governor Boediono said, when asked whether BI maintained its rate to keep rupiah from depreciating further.
Businesses, however, have complained that a high BI rate will prompt banks to raise their lending rates, increasing borrowing costs for businesses to expand, which may eventually undermine economic growth.
Hartadi said lending grew by 34 percent in October, above BI's expectation of about 24 percent. He estimated full-year lending might slow to 30 percent by the year's end.
"Banks can offer any rate they want, but the demand for lending does not drop. What's important is that lending will adjust to the new price, which can help decreasing inflation faster," he said.
Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said BI signaled to the market that it would not tighten its monetary policy, giving the economy room to grow.
"It is the right decision," he said. "If BI cuts its rate, it will show that they have a policy flip-flop."
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