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BI Likely Will Keep Key Interest Rate Steady: Analysts
Jakarta Globe & Reuters | October 09, 2011

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Bank Indonesia is likely to keep its key interest rate at 6.75 percent for an eighth straight month on Tuesday, when its board of governors next meets, helping to ensure growth in Southeast Asia’s biggest economy, analysts say.

Anton Gunawan, an economist at Bank Danamon Indonesia, urged the central bank to hold the benchmark rate this month because financial markets remained volatile. Stock prices and bond yields are off their record levels set in August.

“The current BI rate is quite high, but to mitigate risks it’s at a safe level. BI should adjust it only if the turbulence has subsided,” Anton said. “But by the end of this year, BI’s rate can be adjusted to 6.5 percent, or even twice by 25 basis points at each meeting [to 6.25 percent],” he said.

Most analysts expect the central bank will hold its policy rate steady throughout this year, but some say worsening global sentiment may prompt a cut of 25 basis points in November.

Destry Damayanti, chief economist at Bank Mandiri, the nation’s largest lender, also said the central bank should maintain its benchmark rate as inflation pressure subsides. But she didn’t echo Anton’s call for lower rates.

“Lowering the interest rate, I think, is risky considering current market conditions,” she said. “If it goes lower now, I’m afraid we will see larger outflow.”

BI has widened the lower range of its interbank lending rate by 150 basis points to 5.25 percent. “That should be enough to urge banks to lend more,” Destry said.

Perry Warjiyo, BI’s director of monetary research and policy, said on Wednesday that the central bank expected heavy outflows of global capital from the local bond market to subside, reducing volatility, as most investors had already priced in euro zone uncertainty.

BI raised its key reference rate by a quarter percentage point to 6.75 percent in February to address concerns of an acceleration in inflation.

Indonesia’s economy recorded 6.5 percent growth in the first half this year, and BI is confident it will expand 6.6 percent overall in 2011 as exports remain strong.

The central bank has intervened in recent sessions in the bond and currency markets to stabilize bond prices and the rupiah as foreign investors trimmed riskier assets on euro worries.