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