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Bank Indonesia held its key interest rate at a record low of 6.5 percent for the fifth-straight month on Wednesday, saying inflation was not a major concern in the first half of 2010. The decision was widely expected by economists.

Indonesia recorded an inflation rate of 2.78 percent in 2009, below the central bank’s target of 3.5 percent.

“The decision to maintain the key rate was taken after considering that the BI rate at that level is still consistent with the 2010 inflation target of 4 percent to 6 percent,” said Darmin Nasution, the central bank’s acting governor. “The board of governors sees that the balance of risk from inflationary pressures will not rise until at least the end of the first half of this year.”

Darmin said the 6.5 percent rate would support the forecast of 5.5 percent economic growth this year while maintaining financial stability and encouraging banks to lend more. In 2009, the country posted estimated growth of 4.3 percent.

With inflation forecast to return merely to normal levels this year, some analysts have predicted that the central bank may keep its benchmark rate at 6.5 percent until year-end.

“This year inflation will not be as low as it was in 2009 because there was a carry-over effect from fuel price rises in 2008,” Danareksa Research Institute chief economist Purbaya Yudhi Sadewa said. “Oil prices will also not be as volatile as they were in 2008. Thus, there is a big chance that the BI key rate could be unchanged this year.”

PT Bank Mega director Kostaman Thayib said that although Bank Indonesia was unlikely to lower its key rate in the coming months, lenders still had room to lower their rates.

“With the improving economy, the bad loans ratio will fall, reducing risk and allowing lenders to increase cheap funding,” Kostaman said. Ardian Wibisono