By Aloysius Unditu and Novrida Manurung
Jan. 6 (Bloomberg) -- Indonesia’s central bank kept its benchmark interest rate unchanged for a fifth month, saying it isn’t concerned about inflation pressures in the first half.
Bank Indonesia maintained its reference rate at 6.5 percent, the lowest level since its introduction in July 2005, according to a statement in Jakarta today. All 18 economists in a Bloomberg News survey predicted the decision.
Inflation in Southeast Asia’s largest economy held near a decade low in December, giving the central bank more time before it joins other Asian policy makers in raising borrowing costs. Barclays Plc and HSBC Holdings Plc expect the threat of faster consumer-price gains this year may prompt Bank Indonesia to act next quarter.
“Still-subdued inflationary pressures have definitely left the central bank in the comfort zone, allowing it to watch what is happening to inflation and economic growth before embarking on any monetary tightening,” said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore. “We continue to expect the earliest tightening to come only in the later part of the second quarter.”
Indonesia’s central bank halted cutting rates last August after slashing borrowing costs for nine straight months to shield the $514 billion economy from the worst global recession since the 1930s. The nation has fared better than its neighbors during the worldwide slump, relying less on exports and enjoying consumer confidence buoyed by the most stable political climate since the ouster of former dictator Suharto in 1998.
Bank Lending
Lower borrowing costs have benefited Indonesian companies such as PT Bank Mandiri, the nation’s largest lender by assets, which estimates net income increased to about 6 trillion rupiah ($645 million) in 2009, president director Agus Martowardojo said on Dec. 9. The Jakarta-based company had a profit of 5.3 trillion rupiah in 2008, according to Bloomberg data.
Lending by commercial banks may increase by between 17 percent and 20 percent this year, following a gain of 10.6 percent in 2009, the central bank said today.
Optimism that President Susilo Bambang Yudhoyono’s second term, which began on Oct. 20, will enable the country to achieve its economic potential helped the Jakarta Composite Index climb 87 percent in 2009, its biggest annual gain since 1993.
Indonesia’s rupiah, the best performing currency in the Asia Pacific region outside Japan, rose 16 percent last year. The currency’s recent strength was due to an inflow of capital and action would be taken on the rupiah’s gains when necessary, Bank Indonesia said today.
Currency Gains
The rupiah advanced 1.1 percent to 9,258 per dollar as of 4:25 p.m. in Jakarta, from 9,363 yesterday, according to data compiled by Bloomberg. It touched 9,245, the strongest level since Sept. 4, 2008.
Indonesia’s foreign reserves may increase to between $75 billion and $76 billion this year from $66.1 billion in December 2009, the central bank said. Reserves may rise to as much as $100 billion within a few years, it added.
Yudhoyono’s government wants to spend more than $150 billion over the next five years to improve roads and build ports and power plants, which may further improve growth in an economy that expanded 4.2 percent in the third quarter of 2009 from a year earlier. The economy may have grown 4.4 percent in the fourth quarter, the central bank said today.
Faster Growth
The economy is forecast to expand by as much as 5.5 percent this year, Finance Minister Sri Mulyani Indrawati said on Dec. 8. Gross domestic product grew 4.3 percent last year, the central bank said, adding that prospects for the economy were “improving.”
Indonesia’s consumer prices rose 2.78 percent in December from a year earlier, the central statistics agency said Jan. 4. That was close to the smallest gain since June 2000.
Bank Indonesia doesn’t foresee inflation pressures in the first half and the central bank is “optimistic” about reaching this year’s target, Senior Deputy Governor Darmin Nasution told reporters in Jakarta today. Consumer-price gains are expected to average 4 percent to 6 percent in 2010, he said.
“The benign inflation reading will allow Bank Indonesia to keep rates anchored for some more time to support credit growth and domestic demand,” Prakriti Sofat, a regional economist at Barclays in Singapore, wrote in a Jan. 4 report. “We continue to expect the first 25 basis-point hike in the second quarter of 2010, with the policy rate ending the year at 7.5 percent.”
Australia, Vietnam
The government will improve distribution and transportation systems as it aims to maintain inflation of “no more” than 5 percent this year, Indonesia’s Coordinating Minister for the Economy Hatta Rajasa said Dec. 1. Bank Indonesia expects 2010 inflation to range between 4 percent and 6 percent, it said in a statement published on its Web site in December.
Policy makers in Australia and Vietnam have already begun increasing interest rates to contain rising prices.
Australia’s central bank on Dec. 1 raised its benchmark rate by a quarter percentage point for an unprecedented third straight month as evidence mounts that the nation’s economy is strengthening. The State Bank of Vietnam increased its key rate to 8 percent from 7 percent effective Dec. 1, according to a Nov. 25 statement.
To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@blomberg.net
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