BI to raise interest rate to 9.5%<\/p>\n
Phelim Kyne, Dow Jones\/Jakarta<\/p>\n
The Indonesian central bank's move on Tuesday to raise its
\nbenchmark interest rate to 8.75 percent from 8.50 percent
\nforeshadows a series of increases that could drive the rate up to
\n9.5 percent by the end of the year.<\/p>\n
Inflation pressures, a weakening currency and a desire to
\nfollow U.S. rate hikes all argue for higher interest rates in
\nIndonesia, analysts say.<\/p>\n
\"It makes a lot of sense for Bank Indonesia to keep hiking the
\nrate for the rest of the year...I expect 9.5 percent by year-
\nend,\" said DBS Bank senior economist Chua Hak-Bin.<\/p>\n
Bank Indonesia Senior Deputy Governor Miranda Gultom was
\ntightlipped about the future direction of the bank's benchmark
\nrate, but indicated the bank would closely watch the impact on
\ninflationary pressures of the latest increase.<\/p>\n
\"We will continue to monitor if (the rate hike) contains
\npublic inflation expectations,\" Gultom said.<\/p>\n
\"We will also continue to monitor the external factors that
\neither directly or indirectly affect inflation such as oil prices
\nand the U.S. Federal Reserve rate.\"<\/p>\n
The U.S. Federal Reserve's policy setting committee on Tuesday
\nhiked the Federal Funds rate by one quarter of a percentage point
\nfor the 10th straight meeting. The U.S. central bank's policy
\nrate has risen 250 basis points since June 2004 to 3.50 percent.<\/p>\n
DBS Bank's Chua expects Bank Indonesia's future rate rises
\nwill track increases by the Fed.<\/p>\n
\"I think (Bank Indonesia) will pretty much match (rises in)
\nthe Fed's rate...just to stabilize the rupiah and address
\nconcerns that there's no real weakness there.\"<\/p>\n
Bank Indonesia justified the latest rate hike as necessary to
\naddress inflationary pressure driven by rising oil prices and to
\ndefend the rupiah from a steady slide against the dollar this
\nyear.<\/p>\n
Oil prices have hovered around a record high US$60 per barrel
\nin recent months and accelerated inflationary pressure in
\nIndonesia, Southeast Asia's sole member of the Organization of
\nPetroleum Exporting Countries (OPEC).<\/p>\n
Indonesia's dwindling domestic output has forced the
\ngovernment to steadily increase the proportion of imported oil in
\nits national energy mix.<\/p>\n
But state-owned oil firm Pertamina's voracious appetite for
\ndollars to fund imports has contributed to a 5 percent erosion in
\nthe value of the rupiah against the greenback since the beginning
\nof the year, adding to inflationary pressure.<\/p>\n
Indonesia's currency market didn't react to Bank Indonesia's
\nlatest rate increase, with the rupiah trading at Rp 9,792
\nagainst the dollar at 0809 GMT compared with a closing value of
\nRp 9,795 on Tuesday.<\/p>\n
Bank Indonesia's inflation concerns are likely to keep the
\nbank's benchmark rate rising another 50 basis points in the
\ncoming months, Merrill Lynch Emerging Asian Forex Strategy head
\nSimon Flint said.<\/p>\n
Indonesia's inflation accelerated to 7.84 percent on-year in
\nJuly from 7.42 percent in June.<\/p>\n
\"I think we may have to see more (Bank Indonesia benchmark
\nrate) hikes, particularly if inflation continues to rise,\" Flint
\nsaid. \"In a way, the latest (Bank Indonesia benchmark rate) move
\nsimply keeps pace with inflation.\"<\/p>\n
CIMB-GK Research Pte. Ltd Vice President Song Seng Wun said
\nTuesday's Bank Indonesia benchmark rate increase would lead to a
\nseries of others in the coming months that could put the rate at
\n9.5 percent within nine months.<\/p>\n
Higher rates will likely help the government contain inflation
\nand support the rupiah without smothering an officially projected
\n6.0 percent on-year economic expansion in 2005, he said.<\/p>\n
\"It's appropriate for (Bank Indonesia) to support the rupiah
\nby hiking rates,\" Song said. \"It won't derail growth but will hit
\nthe objective of support of the rupiah in line with inflation
\ncontrol.\"<\/p>",
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