Indonesia Keeps Key Interest Rate Unchanged at 6.5%

By Aloysius Unditu and Novrida Manurung

Nov. 4 (Bloomberg) -- Indonesia’s central bank refrained from raising interest rates, judging that inflation isn’t yet enough of a risk to warrant higher borrowing costs.

Bank Indonesia maintained its reference rate at 6.5 percent, the lowest level since the measure was introduced in May 2005, the central bank said in a statement released in Jakarta today. All 24 economists in a Bloomberg News survey predicted the decision.

The current monetary policy direction is still “conducive for the process of economic recovery,” the central bank said, adding that inflation will continue to ease in the medium term. Consumer prices may rise at the lower end of Bank Indonesia’s 3.5 percent-to-5.5 percent target this year, it said.

Indonesia’s inflation unexpectedly slowed to a nine-year low of 2.57 percent in October, giving policy makers more time before they follow other Asian central banks in exiting monetary stimulus. Prices may start to climb faster in the coming months, according to economists, forcing Bank Indonesia to raise borrowing costs early next year.

“We expect inflation to head higher on account of commodity price movements, mainly food and oil,” said Prakriti Sofat, an economist at Barclays Capital Research in Singapore. “We think tightening will begin in the second quarter next year.”

The Indonesian rupiah rose 0.9 percent to 9,555 against the dollar at 12:31 p.m. in Jakarta today as investors bet the country’s assets will maintain their yield advantage over the U.S., where the benchmark interest rate is near zero.

Australia Rates

The Reserve Bank of Australia yesterday raised interest rates for the second time in four weeks, citing “stronger-than- expected” economic conditions for its decision to raise the overnight cash rate target by a quarter point to 3.5 percent. Australia last month became the first among Group of 20 nations to increase borrowing costs since the height of the global credit squeeze.

The Reserve Bank of India in its Oct. 27 monetary policy statement said the “unconventional” steps taken during the global slump can now be reversed. Governor Duvvuri Subbarao ordered lenders to keep more cash in government bonds, increasing the central bank’s statutory liquidity ratio to 25 percent from 24 percent.

East Asian economies will grow faster than initially estimated this year, adding pressure on central banks to tighten policy and allow currency flexibility to prevent asset bubbles, the World Bank said today.

Limited Scope

Bank Indonesia stopped cutting rates in August after slashing borrowing costs for nine straight months to help shield Southeast Asia’s largest economy from the worst global recession since the 1930s.

Deputy Governor Hartadi Sarwono on Oct. 22 said that Bank Indonesia’s scope to lower rates has become “limited,” indicating that borrowing cost are now more likely to go up rather than down. Inflation may accelerate to between 4 percent and 6 percent next year, the central bank said.

Indonesia’s $514 billion economy is forecast to expand 5.5 percent next year from an estimated 4.3 percent this year, driven by consumer demand, according to the central bank. Indonesian President Susilo Bambang Yudhoyono said last week his government aims to achieve economic growth of 7 percent by the end of his second five-year term in 2014.

Toyota Cars

The economy may expand faster in the fourth quarter than in the previous three months, the central bank said today. The World Bank may raise the country’s 2009 growth forecast from the current estimate of more than 4.3 percent in December, said William Wallace, lead economist in the Washington-based lender’s office in Jakarta.

Car sales in Indonesia may reach 550,000 to 600,000 next year from between 460,000 and 475,000 vehicles in 2009, PT Toyota Astra Motor’s marketing director Joko Trisanyoto said in Bandung on Oct. 22.

“Having weathered the global crisis well, Indonesia looks on course to be one of the fastest-growing economies in the world in 2010,” said James Lord, an economist at Capital Economics Ltd. in London.

To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@blomberg.net