BI to raise interest rate to 9.5%
BI to raise interest rate to 9.5%
Phelim Kyne, Dow Jones/Jakarta
The Indonesian central bank's move on Tuesday to raise its
benchmark interest rate to 8.75 percent from 8.50 percent
foreshadows a series of increases that could drive the rate up to
9.5 percent by the end of the year.
Inflation pressures, a weakening currency and a desire to
follow U.S. rate hikes all argue for higher interest rates in
Indonesia, analysts say.
"It makes a lot of sense for Bank Indonesia to keep hiking the
rate for the rest of the year...I expect 9.5 percent by year-
end," said DBS Bank senior economist Chua Hak-Bin.
Bank Indonesia Senior Deputy Governor Miranda Gultom was
tightlipped about the future direction of the bank's benchmark
rate, but indicated the bank would closely watch the impact on
inflationary pressures of the latest increase.
"We will continue to monitor if (the rate hike) contains
public inflation expectations," Gultom said.
"We will also continue to monitor the external factors that
either directly or indirectly affect inflation such as oil prices
and the U.S. Federal Reserve rate."
The U.S. Federal Reserve's policy setting committee on Tuesday
hiked the Federal Funds rate by one quarter of a percentage point
for the 10th straight meeting. The U.S. central bank's policy
rate has risen 250 basis points since June 2004 to 3.50 percent.
DBS Bank's Chua expects Bank Indonesia's future rate rises
will track increases by the Fed.
"I think (Bank Indonesia) will pretty much match (rises in)
the Fed's rate...just to stabilize the rupiah and address
concerns that there's no real weakness there."
Bank Indonesia justified the latest rate hike as necessary to
address inflationary pressure driven by rising oil prices and to
defend the rupiah from a steady slide against the dollar this
year.
Oil prices have hovered around a record high US$60 per barrel
in recent months and accelerated inflationary pressure in
Indonesia, Southeast Asia's sole member of the Organization of
Petroleum Exporting Countries (OPEC).
Indonesia's dwindling domestic output has forced the
government to steadily increase the proportion of imported oil in
its national energy mix.
But state-owned oil firm Pertamina's voracious appetite for
dollars to fund imports has contributed to a 5 percent erosion in
the value of the rupiah against the greenback since the beginning
of the year, adding to inflationary pressure.
Indonesia's currency market didn't react to Bank Indonesia's
latest rate increase, with the rupiah trading at Rp 9,792
against the dollar at 0809 GMT compared with a closing value of
Rp 9,795 on Tuesday.
Bank Indonesia's inflation concerns are likely to keep the
bank's benchmark rate rising another 50 basis points in the
coming months, Merrill Lynch Emerging Asian Forex Strategy head
Simon Flint said.
Indonesia's inflation accelerated to 7.84 percent on-year in
July from 7.42 percent in June.
"I think we may have to see more (Bank Indonesia benchmark
rate) hikes, particularly if inflation continues to rise," Flint
said. "In a way, the latest (Bank Indonesia benchmark rate) move
simply keeps pace with inflation."
CIMB-GK Research Pte. Ltd Vice President Song Seng Wun said
Tuesday's Bank Indonesia benchmark rate increase would lead to a
series of others in the coming months that could put the rate at
9.5 percent within nine months.
Higher rates will likely help the government contain inflation
and support the rupiah without smothering an officially projected
6.0 percent on-year economic expansion in 2005, he said.
"It's appropriate for (Bank Indonesia) to support the rupiah
by hiking rates," Song said. "It won't derail growth but will hit
the objective of support of the rupiah in line with inflation
control."