Bank Indonesia again hikes key rate, this time by 50 bps

Urip Hudiono, The Jakarta Post, Jakarta

The central bank raised on Tuesday its key interest rate by another 50 basis points (bps) to 12.75 percent in an attempt to strike a balance between containing inflation and maintaining economic growth.

"The hike is a response to the recent inflationary pressures, and we will continue with our tight monetary policies to guide the inflation expectation forward," Bank Indonesia governor Burhanuddin Abdullah told a press briefing after the Bank's board of governors monthly meeting.

Burhanuddin, however, added that the present rate hike was also considered to be sufficient enough to help Indonesia's economic recovery process as a whole, including in terms of growth.

"The present rate is considered to be sufficient to maintain stability in the monetary sector, as well as the business sector's ability to cope with the recent fuel price hike and other external factors," he said.

Tuesday's rate increase was the sixth since the central bank introduced its inflation-targeting BI Rate at an initial level of 8.5 percent in June.

BI has been raising its rate to curb inflation and help support the rupiah, which was in a slump in recent months amid soaring global oil prices.

The rate hikes have contributed to a slowdown in economic growth, from 6.2 percent in this year's first quarter to 5.3 percent in the third. Higher interest rates may slow down the economy, as both consumer loans and credit for business expansion become more expensive.

BI last hiked its rate by 125 bps to 12.25 percent in November, after inflation in October skyrocketed to 17.89 percent year-on-year.

With inflation still continuing its upward trend to 18.38 percent in November, analysts had estimated that BI would again hike its rate drastically, perhaps to 13 percent.

BI now sees full-year inflation reaching 18 percent, he added, but will be able to ease that down to 8.0 percent by the end of 2006 with consistent monetary policies. The government had forecast an 8.6-percent full-year inflation rate for this year's budget.

On economic growth, Burhanuddin expects that the economy will still be able to expand by between 5.3 percent and 5.6 percent for this year, despite the inflation.

The government is more optimistic, forecasting full-year growth of 6 percent.

The financial markets, which had reacted positively to the recent Cabinet changes, also welcomed Tuesday's rate hike in an upbeat matter.

The Jakarta Stock Exchange Composite Index closed 2.857 points higher at 1,123.435, while the rupiah ended slightly stronger at Rp 9,930 to the dollar compared to Monday's Rp 9,955.

Meanwhile, on the central bank's policies towards the country's banking sector, Burhanuddin said BI would review its regulation that requires banks to be more prudent by assigning the same collectibility status to debtors with loans from multiple creditors, which have resulted in slower credit growth and a rise in non-performing loans (NPL).

"This (review) is expected to give more latitude for banks for their intermediation function of providing loans," he said.

Furthermore, for the purpose of the sector's consolidation process, BI will also consider implementing a "single presence policy" in the ownership of banks.

Under the policy, controlling shareholders of banks may be advised to merge their banks.