Indonesia Keeps Key Rate Unchanged to Boost Economy

By Aloysius Unditu

Dec. 3 (Bloomberg) -- Indonesia’s central bank kept its benchmark interest rate unchanged for a fourth month, judging that the need to support growth outweighs the risk of inflation.

Bank Indonesia maintained its reference rate at 6.5 percent, the lowest level since its introduction in May 2005, according to a statement in Jakarta today. All 27 economists in a Bloomberg News survey predicted the decision.

Indonesia’s inflation unexpectedly slowed to a decade low of 2.41 percent in November, giving the central bank more time before it follows other Asian policy makers and raises borrowing costs. The Reserve Bank of Australia this week increased its benchmark rate for a third consecutive meeting and India has signaled it may need to act soon.

“Monetary policy hikes are expected from the second quarter of 2010, with history suggesting gradual rather than rapid tightening,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “If price expectations rise rapidly, the central bank is likely to act more aggressively.”

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.

Indonesia’s $514 billion economy may expand 4.3 percent this year and between 5 percent and 5.5 percent in 2010, the central bank said in a statement today.

‘Strong Resilience’

“The board of governors is of the view that Indonesia’s economy in 2009 has shown a strong resilience in responding to the global financial crisis,” the statement said.

Faster growth may help companies in Indonesia to increase sales. The Indonesian economy has fared better than its neighbors during the worldwide recession as it is less reliant on exports. Consumer spending has also been buoyed by the most stable political climate since the ouster of former dictator Suharto in 1998.

Growth accelerated in the three months to Sept. 30 for the first time in five quarters, with gross domestic product expanding 4.2 percent from a year earlier. The economy may expand faster in the fourth quarter than in the previous three months, the central bank said in November.

Car and motorcycle purchases in Indonesia are forecast to grow between 20 percent and 30 percent next year on an improving economy, said Rudyanto Somawihardja, president director of PT Sinar Mitra Sepadan Finance.

Sales at Sinar Mitra are expected to increase to 3.5 trillion rupiah in 2010 from an estimate of between 1.3 trillion rupiah and 1.5 trillion rupiah this year, Rudyanto said.

Australia, India

Inflation may accelerate to “no more” than 5 percent next year, Indonesia’s Coordinating Minister for the Economy Hatta Rajasa said on Dec. 1 in Jakarta. Gains in consumer prices this year may be “lower than” the target of 3.5 percent to 5.5 percent, the central bank said today.

Australia’s central bank on Dec. 1 raised its benchmark interest rate by a quarter percentage point for an unprecedented third straight month as evidence mounts that the nation’s economy is strengthening.

The Reserve Bank of India on Oct. 27 took the first step toward withdrawing its record monetary stimulus as inflation pressures build, ordering lenders to keep more cash in government bonds.

Indonesia is “unlikely to signal an exit strategy yet,” said Johanna Chua, head of Asian economic research at Citigroup Inc. in Hong Kong. “We do not expect Bank Indonesia to turn hawkish until the second quarter of 2010.”

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