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BI Seen Standing Pat on Interest Rate as Subsidy Restriction May Push Inflation
Francezka Nangoy | January 10, 2012

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Bank Indonesia’s policy-setting committee meets on Thursday, and some economists say the central bank is likely to keep its key interest rate unchanged for a second month on concern that inflation will accelerate later this year.

Inflation in December was 3.79 percent, the lowest in 21 months, but that may quicken in the next few months on halts in increases of a subsidized-fuel program.

Finance Minister Agus Martowardojo said on Thursday that starting in April, the government would start implementing a plan to restrict the use of subsidized fuel to help reduce state spending and trim the budget deficit.

“I don’t expect Bank Indonesia to cut, or to raise, the rate. They will keep the rate where it is now for as long as they can,” said Taimur Baig, director and chief economist at Indonesia Deutsche Bank. “The thing that will lead the central bank to review the rate measure is the fuel subsidy restriction, which is planned to be applied in April.”

The central bank cut its benchmark rate in November and October by a total of 0.75 percentage points to 6 percent, the lowest since the policy rate was set in 2005.

Many commercial banks have hesitated to match the declining rate. That may give the central bank additional motivation to maintain the rate at 6 percent.

“BI also needs to maintain its credibility, so they can’t just cut the rate and raise it the next month and cut it again,” said Juniman, chief economist at Bank Internasional Indonesia.

Fauzi Ichsan, chief economist at Standard Chartered Indonesia, agreed the central bank would likely keep its rate steady, citing potential inflationary pressure in the near term and the “fragility” of the rupiah.

“Since BI set the rate at 6 percent, the rupiah’s exchange against the dollar has never gone lower than 9,000,” Juniman said. “It means this rate is no longer attractive for foreign investors. To cut more would mean more pressure on the rupiah.”

The rupiah closed at 9,190 against the dollar on Tuesday.