BI holds rate, optimism on economic recovery

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Thu, 11/05/2009 10:39 AM  |  Business

The central bank kept its benchmark interest rate at 6.5 percent Wednesday, considering that it would be “conducive” to a recovery and banking intermediation.

It was the fourth time Bank Indonesia (BI) has maintained its rate after cutting 300 basis points between December and August.

“The level seems consistent with a real interest rate of around 1.5 percent against BI’s 2010 expected inflation rate,” Bank Danamon economists Anton Gunawan and Helmi Arman said in a statement.

BI expected inflation to reach 5 percent (plus minus 1 percent) in 2010, up from an estimated 4 percent this year. The real interest rate is the difference between inflation and benchmark rate.

BI’s language on Wednesday seemed to show “more optimism on inflation in the short and medium terms,” they said.

BI said: “Inflation is estimated to keep declining in the medium term to a level equivalent to neighboring countries.”

Citi analyst Johanna Chua said BI reaffirmed its commitment to guarding against inflation, estimating that BI might start raising its rate gradually by as early as March 2010.

“BI now expects Indonesia’s economy will grow at a higher rate in the fourth quarter than in the third quarter of 2009,” she said.

BI estimated the economy should show full-year growth of between 3 percent and 4 percent, with a real upside possibility.

Standard Chartered economist Eric Sugandi said BI might start raising its rate early next year on rising inflationary pressures.

“We expect the government to raise basic electricity tariffs in the first quarter of 2010. As the global economy continues to recover, we expect oil prices to continue increasing in 2010, causing non-subsidized fuel prices and perhaps subsidized fuel prices to increase,” he said.

BI was confident that banks would respond to the BI rate in adjusting deposit and lending rates.

BI acting governor Darmin Nasution said last week banks would be asked to cut interest rate spread to lower lending rates, after 14 major banks agreed on Aug. 20 to cut their deposit rates to 150 basis points above the BI rate within three months; and after three months they will further cut the rates down to 50 basis points above the BI rate.

BI expected banks would disburse more loans in the coming months as the economy began recovery and lending rates declined.

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