T

he central bank has kept its benchmark interest rate at a record low 6.5 percent for a fifth straight month considering there are good economic prospects ahead and that inflation will be manageable.

In a statement Thursday, Bank Indonesia (BI) said the cumulative 300-basis-points rate cuts since December last year were "quite conducive" for economic recovery and the banking sector.

BI acting governor Darmin Nasution said Wednesday the 6.5 percent rate was "appropriate" seeing inflation would likely increase to 5.5 percent in 2010. Inflation was predicted at 3 percent this year, he said.

"Ahead, monetary policies will be aimed at consistently keeping a low inflation rate by still watching over efforts to accelerate economic recovery," BI said in the statement.

BI estimated the economy in 2009 would expand 4.3 percent, in line with the government's estimate, and further increase to between 5 and 5.5 percent. In 2011, the rate of economic growth is expected to reach 6 to 6.5 percent.

Throughout 2009, BI reports showed that lending rates on average declined 76 basis points only, compared with BI rate cuts of 275-basis points. But one-month deposit rates dropped 337 basis points, so that the spread between deposit rates and lending rates was very high.

High lending rates led to weak growth in lending of only 4.2 percent from January to October. Last year, lending grew by almost 30 percent, BI said.

Standard Chartered economist Eric Sugandi said in an interview that BI held its rate because inflation would be "manageable", while providing room for banks to cut lending rates. He said the current BI rate was "conducive" for the rupiah.

BI said the local currency had strengthened significantly by 15.3 percent from 10,900 per US dollar at the end of 2008 to 9,445 by the end of this November.

Eric said BI would likely start raising its rate in the first quarter of 2010 as inflation rose because of increasing demand. "Global oil prices may continue to increase. The government may have to raise the prices of subsidized fuels and basic electricity rates."

He predicted BI would raise its rate by 100 basis points during 2010. "But there is a possibility the rate increase may be delayed if inflation is still manageable in the first quarter *next year*."