B

ank Indonesia (BI) maintained its benchmark interest rate at 6.75 percent for a fourth consecutive month on Thursday following a decline in May inflation.

In a statement issued following the policy meeting of its board of governors, the central bank said the interest rate would remain the same after learning about the downward trend in inflation.

“Inflation is on the downward trend, especially with the continuous decrease in food prices. Moving forward, Bank Indonesia will remain vigilant on the downside risks to macroeconomic stability, particularly capital inflows, strengthening domestic demand and surging inflationary pressures particularly in 2012,” the board said in a press release.

The central bank maintained the current level after raising it by 25 basis points in February following the surge in inflation to a 21-month high of 7.02 percent in January.

Year-on-year headline inflation slid to 5.98 percent in May, slightly lower than the 6.16 percent recorded in April.

However, core inflation — which accounts for 65 percent of headline inflation measurements and excludes government-controlled and volatile food prices — continued to increase to 4.64 percent during the month.

“With headline inflation likely to show more benign year-on-year rates in the coming months due to a favorable base effect from last summer’s chile spike, there may be some more wriggle room for the central bank to relax further, unless core inflation becomes more restless,” said HSBC economist Wellian Wiranto.

BI deputy governor for monetary operation Budi Mulya, however, said the central bank “has not yet seen signs of heavy pressure from the demand side... Supply could still fulfill the demands”.

Budi said the central bank sees volatile food prices soaring through the beginning of the new academic year and fasting month in August. “We have calculated... but we can assure that 2011 inflation will be as targeted.”

The central bank’s official inflation forecast for 2011 is 4 to 6 percent, but one BI deputy governor, Hartadi A. Sarwono, said the country’s headline inflation may fall in the upper range of the target, or between 5.5 and 6 percent if the government maintains its current fuel subsidy policy.

The appreciation trend of the rupiah, according to Budi, will continue to help achieve the target and ease inflationary pressures, particularly for imported products. The rupiah has gained more than 5 percent so far this year, versus 4.4 percent appreciation throughout last year, one of Asia’s top currency performers.

“[The rupiah] has been stable because it does not distract external and internal balance. Balance of payment has been okay and inflation is still on target,” Budi said, adding that the central bank’s currency assessment also relies on the currency trends of emerging markets.

“[Emerging markets] are all appreciating, so the calculation on [product] competitiveness is just the same,” he added.

Economists noted that it was clear that BI still preferred to fight inflation from the currency front as long as the trade account remained supportive. “Allowing further currency gains will work in containing inflationary pressures while supposedly doing little harm to the economy,” said Gundy Cahyadi, an economist at OCBC, who, much like several other economists, expects the rate to close the year at 7.25 percent.