Indonesia Raises Key Interest Rate as Inflation Gains

By Aloysius Unditu and Arijit Ghosh

Oct. 7 (Bloomberg) -- Indonesia's central bank raised its policy rate to slow inflation and boost the rupiah after the nation's stock index plunged 10 percent yesterday amid a global credit crisis.

Bank Indonesia Governor Boediono and his seven colleagues raised the BI Rate to 9.5 percent today, from 9.25 percent. Fourteen of 19 economists surveyed by Bloomberg News forecast today's move, with five expecting no change.

Indonesia refrained from joining Australia, which cut rates today by the most since a recession in 1992, China and Taiwan in reducing borrowing costs after inflation accelerated last month to a two-year high. Still, today's increase may be the last this year as the central bank shifts its focus to supporting growth, said Helmi Arman at PT Bank Danamon Indonesia.

``They must be careful not to overdo'' rate increases because it could affect growth, said Arman, based in Jakarta. ``At 9.5 percent there will already be a quite thick spread over inflation expectations.''

A benchmark rate of 9.5 percent would be ``adequate'' to keep price gains between 6.5 percent and 7.5 percent next year, Deputy Governor Hartadi Sarwono said in an interview on Aug. 8. Today's decision marked the sixth straight increase in the policy rate by Bank Indonesia.

``The move to increase the rate is consistent with our monetary-policy strategy,'' Boediono said at a briefing in Jakarta. ``The policy to stabilize the rupiah is directed toward avoiding excessive fluctuation.''

Rupiah Declines

The rupiah fell 0.2 percent to 9,595 against the dollar at 12:01 p.m. in Jakarta, extending yesterday's 1.5 percent decline. The currency has dropped 2.3 percent in the past month, increasing the cost of importing fuel, soybean and wheat.

``The need to support the rupiah should help Bank Indonesia justify its decision to raise the rate,'' said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta.

Consumer prices rose 12.1 percent from a year earlier last month, after gaining 11.85 percent in August.

``We expect inflation to remain above 11 percent through January, and for that reason,'' the central bank was expected to raise the rate, Michael Spencer, chief Asia economist at Deutsche Bank AG, said in a note to investors. ``Slowing growth and, eventually, falling inflation should see the central bank cutting rates in the second half of 2009.''

Accelerating inflation and a rout in commodity stocks led to the biggest decline in the benchmark stock index yesterday since the 2002 Bali bombings.

Indonesia's President Susilo Bambang Yudhoyono yesterday said his government seeks to keep economic growth at 6 percent and will remain alert amid the credit-crisis ``tsunami,'' which started in the U.S.

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