Bloomberg Indonesia May Hold Rate at First 2011 Meeting Even as Price Pressures Rise

Indonesia’s central bank may keep interest rates at a record low at its first meeting of 2011, delaying an increase even after inflation accelerated to a 20- month high.

The reference rate will stay at the 6.5 percent level set in August 2009 this month, according to 13 of 15 economists surveyed by Bloomberg News. Two expect a quarter-point increase. Bank Indonesia will give its decision in Jakarta tomorrow.

Indonesia ordered banks to set aside more cash as reserves to reduce inflationary pressure in 2010, while refraining from joining Malaysia, Thailand and India in boosting borrowing costs. A rate increase would risk luring more capital as Europe’s sovereign credit woes and a U.S. unemployment rate that remains above 9 percent restrain growth in developed markets, spurring funds to seek better returns in emerging economies.
“Indonesia has been reluctant to hike interest rates, preferring to tighten via non-rate measures and ascribing the inflation surge to largely volatile food prices,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. “We expect Bank Indonesia to hold its policy interest rate at 6.5 percent, despite the inflation threat.”

Consumer prices rose 6.96 percent last month from a year earlier, a report showed yesterday, exceeding the 6.71 percent median forecast in a Bloomberg survey of 14 economists. Core inflation was 4.28 percent in December, easing from 4.31 percent the previous month.
Core Inflation

Bank Indonesia “won’t hesitate” to raise its benchmark rate if core inflation exceeds 5 percent, Deputy Governor Hartadi Sarwono said Dec. 22. The current rate is consistent with Indonesia’s goal of achieving inflation of 4 percent to 6 percent in 2011 and 3.5 percent to 5.5 percent in 2012, Deputy Governor Budi Mulya said last week.

Southeast Asia’s largest economy escaped a recession during the 2009 global slowdown and its expansion has pushed stocks to a record and lifted the rupiah to a three-year high. Moody’s Investors Service said last month it’s placed the nation’s Ba2 credit rating on review for a possible upgrade, citing the nation’s economic resilience and improving debt position.

The rupiah gained 4.6 percent in 2010 and reached 8,875 a dollar on Nov. 5, its strongest level since June 2007. The Jakarta Composite Index gained 46 percent last year, the best performer among Asia’s 10 biggest stock markets.   more ...