BI’s interest rate decision acceptable, say analysts

Bank Indonesia’s decision Wednesday to keep its benchmark rate at 6.5 percent is realistic although inflationary pressure will likely remain strong in the coming months, say several analysts.

Analysts agreed that monthly inflation, which had reached a 15-month high in July, had been anticipated by the central bank. “As factors which caused the sharp increase in the July inflation rate are seasonal and temporary, BI’s decision to maintain its key rate at 6.5 percent is acceptable for the time being.” Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa told The Jakarta Post.

“It’s better for BI to wait rather than make a bad decision. It’s too early to change the rate,” he added.

Monthly inflation accelerated to 1.57 percent in July. This makes the inflation to increase to 4.02 percent from January to July, slightly lower than the inflation rate target of 5.3 percent for the whole year.

BI spokeswoman Dyah N.K. Makhijani said in an official statement that the July inflation rate was still within the central bank’s target although it was higher than levels recorded in previous months.

The central bank will adjust the minimum reserve requirement imposed on banks in order to help ease inflationary pressures in the coming months, she added.

BI is finalizing a new regulation that sets minimum and maximum limits for bank’s loan-to-deposit ratio (LDR) at 75 percent and 105 percent to encourage banks to increase lending. Otherwise, banks would have to increase the amount of their reserves in the central bank.

Bank Danamon economist Anton Gunawan said that the change in the LDR policy would help BI control inflation in the coming months, since increasing the reserves of banks that did not comply with the regulation would reduce the money in circulation.

Some analysts have predicted BI will keep its benchmark rate at 6.5 percent constant through 2010 and start to raise it in early 2011

Bank Indonesia has maintained its key rate for 12 consecutive months although central banks in other Asian countries have begun to increase their borrowing costs in order to ease inflationary pressures.

The central bank’s policy to keep a low interest rate is in line with the government’s target to achieve annual economic growth of at least 6 percent.

Stock prices recorded the largest decrease in almost two months Tuesday following the release of the Central Statistics Agency’s (BPS) July inflation report.

The report said that consumer prices rose 6.22 percent in July from the same period last year. Year-to-date inflation rose to 4.02 percent.

The higher inflation rate raised concerns that the central bank would raise its interest rate to keep pace.

BPS chairman Rusman Heriawan said the higher inflation rate in July was attributed to the increase in the prices of several commodities especially rice and vehicle taxes.

An increase in rice prices contributed 0.26 percent to inflation in July, while vehicle taxes contributed 0.21 percent. (est)