B

ank Indonesia kept its benchmark interest rate at record low of 6.5 percent for the 18th consecutive month on Wednesday, saying that the nation’s core inflation rate remained low.

BI Governor Darmin Nasution said that the inflation remained “safe” because the sharp increase in inflation in December could be attributed to increases in food and administered prices.

Core inflation, which posed more of a threat to the economy, was still within tolerable levels, he said. “This is the reason why the central bank’s key rate has been kept unchanged,” he said.

The Central Statistics Agency (BPS) reported on Monday that the nation’s headline inflation rate rose by 6.96 percent in 2010 mainly due to increases in food prices.

The BPS, however, said that the core inflation rate, the price index which excludes certain items that face volatile price movements such as food and energy, was only 4.28 percent.

“Core inflation was still low at 4.28 percent. It’s still within the range that we expected — even below our estimates,” Darmin said.

He said that the higher-than-expected inflation would affect household spending.

To curb further increases in food prices, the government would have to work harder, especially in improving distribution, he added.

“Otherwise, inflationary pressures will grow, resulting in an increase in core inflation. If that happens, of course, BI will respond with monetary policy,” Darmin said, adding that BI’s rate might be raised if core inflation exceeded the central bank’s targets.

“Coordination with the government through the inflation controlling team needs to be strengthened with new programs,” Darmin said.

Central bank deputy governor Hartadi A. Sarwono previously said that the central bank would raise interest rates if the core inflation rate reached 5 percent.

BI has kept the benchmark BI rate at a record-low of 6.5 percent for 18 consecutive months, since August 2009, to provide businesses with low interest rates to fuel expansion, hoping to help spur economic growth in Southeast Asia’s largest economy.

The current interest rate is in line with the central bank’s target of keeping inflation at 6 percent in 2011 and between 3.5 percent and 5.5 percent in 2012.

Eric Sugandi, an analyst at Standard Chartered Bank Indonesia, agreed with BI’s assessment of the current level of core inflation, adding that it was still safe for the central bank to keep the interest rate at 6.5 percent.

However, Eric said that it would be difficult to maintain the core inflation at 4 percent when the government began to restrict the sale of subsidized fuel for private cars in April as planned.

“The planned limitation of the fuel subsidy could push up the core inflation rate,” he said, adding that a further increase in core inflation would force the central bank to act.

Analysts have forecast that the central bank would raise the benchmark rate by 25 basis points to 6.75 percent in March and another 25 basis points to 7 percent by the end of the first half of 2011.

Rupiah was little changed after the central bank kept its benchmark interest rate at a record low.

The currency traded at 8,983 per dollar as of 4:19 p.m. in Jakarta. The rupiah reached 8,940 to the dollar Tuesday, the strongest level since Nov. 23. (est)