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Central Bank May Back Off More Interest Rate Hikes
Novrida Manurung & Greg Ahlstrand | February 25, 2011

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Bank Indonesia may refrain from another interest-rate increase after a hike this month as other efforts to tame inflation should be sufficient, said Hartadi Sarwono, a deputy governor.

While rising oil prices will have an impact on inflation, the government’s suggestion to delay a planned cut of subsidized fuel sales and a “declining trend” in food costs mean consumer prices may rise as little as 0.5 percent in February from the previous month, Sarwono said.

“Up to now, we’re happy with 25 basis points,” Sarwono said late on Thursday.

“If inflation will behave as I mentioned, I think we don’t need to raise it again,” he said, adding that the benchmark rate can stay at the current level while the central bank monitors the impact of higher oil prices.

Bank Indonesia raised its reference rate by a quarter-point to 6.75 percent on Feb. 4, after inflation climbed to a 21-month high. It had previously resisted raising rates, seeking to curtail more foreign capital inflows by opting instead to increase lenders’ reserve requirements and tightening rules on banks’ foreign-exchange holdings to curb price advances.

“The message the central bank is giving to the market isn’t clear,” Juniman, chief economist at Bank Internasional Indonesia, said on Friday. “If inflation expectation remains high and they don’t respond to this with raising rates, then both foreign and local investors will question the central bank’s credibility.”

The central bank “absorbed liquidity in the market by raising the reserve requirement last year, which absorbed Rp 50 trillion to Rp 60 trillion [$5.7 billion to $6.8 billion] and we raised the foreign reserve requirement, which will absorb $3 billion to $4 billion,” Sarwono said.

He also said Bank Indonesia would allow the rupiah to appreciate to help keep “imported inflation” in check. The currency has climbed 5.6 percent against the US dollar in the past 12 months, less than the Malaysian ringgit, Singapore dollar, Thai baht and Taiwanese dollar.

Indonesia and the Philippines are the only two major Southeast Asian economies that did not raise rates last year to keep inflation in check. The Philippines still has not increased borrowing costs this year.

“There may be a short-term impact on inflation but not, perhaps, to the extent of upsetting our year-end inflation target of 3 percent to 5 percent for 2011,” Philippine central bankDeputy Governor Diwa Guinigundo said in Sri Lanka late on Thursday.

“It’s too early to say whether the central bank can afford to keep policy rates steady.”

Indonesia’s inflation will slow in the second half of the year after peaking in the first six months, Sarwono said.

The central bank is due to decide on whether to hike rates or let them stand on March 4.



Bloomberg