The central bank is holding its benchmark interest rate for the first time in 10 months, considering the current rate is "conducive enough" to support growth while at the same time the threat of inflation could undermine economic progress.
Bank Indonesia (BI) held its benchmark rate at 6.5 percent, after cutting it by 300 basis points since December last year, the central bank said in a statement Thursday.
BI's board of governors predicted that the tendency to inflation would become a normal influence as the economy began to recover, with increasing commodity prices. BI senior deputy governor Darmin Nasution said inflation in Indonesia normally reached above 6 percent.
BI estimates inflation may hover at 5 percent (plus or minus 1 percent) in 2010, up from less than 4 percent this year.
Inflation in August rose 2.75 from a year earlier due to increasing demand in the fasting month, according to the Central Statistics Agency (BPS). It was the first time inflation rose on a yearly basis this year.
The fasting month began on Aug. 22. Usually people spend more in the fasting month, eating more food and beverages when they break their fast than in normal months.
In the financial sector, banks have yet to respond to the BI rate cut, but their responsiveness is improving as shown by increasing loans and declining lending rates, BI said.
As of July, lending rates declined 108 basis points on average. The lending rate for working capital loans dropped 85 basis points and for investment loans 83 basis points, while consumer loan lending rates rose 53 basis points.
Bank lending between January and July booked 1.2 percent growth, or Rp 15.9 trillion (US$1.57 billion).
Fourteen major local banks have agreed recently to cap their deposit rates 150 basis points above the existing BI rate within three months from Aug. 20 - a move expected to cut lending rates in a bid to ease borrowing costs for businesses to expand, hopefully spurring growth.
They will cut the lending rates down to 50 basis points above the BI rate after the three months.
Foreign and joint-venture banks are expected to follow suit fairly quickly.
"There is no use in BI cutting its rate *this month* as bank lending rates have yet to follow suit," said Purbaya Yudhi Sadewa, chief researcher of Danareksa Research Institute.
Yudhi said BI might wait for September's inflation rate before determining its BI rate policy response.
