BI keeps key interest rate unchanged

The Jakarta Post/Jakarta

The central bank left on Wednesday its benchmark interest rate unchanged defying earlier expectations that Bank Indonesia would push the rate higher amid stronger inflationary pressure and the rising interest rate trend in the U.S.

The interest rate on the one-month SBI promissory notes was unchanged at 7.37 percent during a twice-weekly auction of the notes.

No explanation was given behind the move, but it could well be seen as a sign that Bank Indonesia's concerns about inflationary pressure had eased.

The central bank said earlier that it was keeping an interest rate increase as an option in order to retain monetary stability amid strong pressure on the rupiah.

The fragile rupiah, which pushed up the prices of imported goods, helped in part lift the inflation level, as the Central Statistics Agency (BPS) reported that year-on-year inflation in July had reached a worrying 7.2 percent, higher than the official targeted average rate of 6.5 percent.

Bank Indonesia's decision should provide assurance that banks would not raise lending rates, at least for now, which would otherwise hurt the economy.

Bankers have mostly opposed the rapid increase in BI's interest rate, saying it would eventually force them to raise their interest rates for loans. Some have said that, even if the central bank was to raise the SBI, it had to be conducted in phases and at a small margin as well.

A gradual, limited increase in SBI promissory notes remains the best solution to strike a balance between easing pressure on the rupiah and inflation, and keeping banks from raising their lending rates.