Benchmark Indonesian Central Bank Rate Held at 6.5%

January 5, 2011

Unlike other Asian countries like China, Malaysia, India, South Korea and Thailand where central bank rates are already in uptrends, Bank Indonesia’s benchmark rate remains at its cyclical low.  Three hundred basis points of easing were administered in nine consecutive moves from December 2008 through August 2009.  The continuing decision to eschew a rate increase, which was anticipated correctly by analysts, does not stem from a lack of economic recovery.  Real GDP posted on-year advances of 6.4% in the second quarter of 2010 followed by 5.8% in the third quarter.  Nor does the decision reflect benign inflation.  On-year CPI inflation has accelerated from 5.7% in October to 6.3% in November and 7.0% in December when the index also jumped 0.9% in monthly terms.  Bank Indonesia observes a 4-6% CPI target, and officials today observed that inflation pressure is rising and being monitored.  Monetary officials fear that a rate hike will stimulate excessive inflows of hot money and lift the rupiah, so they have resorted in the past to other credit tightening actions like a hike in reserve requirements.  Moreover, core inflation is only 4.3%.  But the target applies to total CPI inflation, and analysts think an increase of core through 5.0% with continuing above-target total inflation will trigger a quick rate increase.  In any case, a hike before midyear is considered likely.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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