Indonesia Says Rate at 9.5% `Adequate' for Inflation

By Aloysius Unditu and Arijit Ghosh

Aug. 8 (Bloomberg) -- Indonesia's central bank may increase interest rates to as much as 9.5 percent and prevent the rupiah from depreciating too fast to slow inflation, Deputy Governor Hartadi Sarwono said.

A benchmark rate that's 2 percentage points above Bank Indonesia's 2009 inflation target is ``adequate'' to keep price gains between 6.5 percent and 7.5 percent next year, Sarwono said in an interview in Jakarta today. ``We are not stopping'' after raising the key rate to 9 percent this week, he added.

Higher borrowing costs may attract investors to Indonesian assets and help prevent a rapid depreciation in the rupiah as prices for the nation's commodity exports decline. A sudden weakening of the currency could prompt manufacturers to pass on prices of imported raw materials, stoking inflation that reached a 22-month high of 11.9 percent in July.

Bank Indonesia on Aug. 5 raised its benchmark rate for a fourth straight meeting, increasing borrowing costs by a quarter point from 8.75 percent. Inflation may accelerate further before the world's most populous Islamic nation celebrates Id-ul-Fitr, which marks the end of the holy fasting month of Ramadan.

``The Muslim festival of Id-ul-Fitr in October will add to inflationary pressures, so Bank Indonesia needs to raise rates again,'' said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. ``A policy rate at 9.5 percent is the correct assessment.''

Currency Market

The central bank will also ensure Indonesia's currency doesn't appreciate past 9,000 to the dollar on average this year, Sarwono said. The rupiah, the third-best performing among Asia's 10 most-traded currencies outside Japan in the past three months, has averaged 9,239 per dollar in 2008.

The rupiah fell 0.6 percent to 9,158 against the U.S. currency at 1:33 p.m. in Jakarta, heading for its biggest drop since March. Bank Indonesia will buy or sell the currency to keep the exchange rate stable, the central banker said.

``Intervention is still important,'' Sarwono said. ``We see the demand from Pertamina is very high. It's not fair for the central bank to let the market fulfill that demand because a big part of oil and gas revenue is placed with the central bank.''

PT Pertamina, Indonesia's state oil company, needs to buy U.S. currency to import oil products as its refineries don't produce enough fuel to meet local demand. The company imported an estimated 12.1 million barrels of oil products in June.

Wholesale-price inflation accelerated to 34.7 percent in June, the fastest pace in nine years. About 70 percent of the raw materials used by manufacturers in Indonesia are imported.

Should manufacturers perceive the rupiah weakening to 9,400 against the dollar ``it could trigger them to pass on the cost'' to consumers, Sarwono said. ``A big part of production costs comes from imported inflation.''

To contact the reporters on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.netArijit Ghosh in Jakarta at aghosh@bloomberg.net