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Bank Indonesia decided Tuesday to keep its key interest rate
unchanged at 12.5 percent amid renewed pressure on oil prices and the
possibility of a further hike in U.S. interest rates, but said that the
rate may decline next month.
"After considering various recent internal and external factors, Bank
Indonesia decided today to maintain the Bank Indonesia rate at 12.50
percent," the central bank said in a statement issued following the
monthly board of governors meeting to decide on the bank's interest
rate policy.
"Going forward, if assessment on overall aspects of the economy shows
that the risk has declined, then a further cut in the interest rate can
be made," it added.
The move to retain the rate used as a reference for bill sales ran
counter to recent remarks made by BI Governor Burhanuddin Abdullah, who
said the central bank was likely to stay the course in its recent
policy of lowering interest rates to help support Indonesia's economic
growth, despite a rise in inflation in May.
"The confidence (to continue the rate cut) remains strong, although we
will still assess the whole situation up to our policy meeting next
week," he said late last week.
The central bank paused, after cutting the rate in May for the first
time in 10 months, as inflation accelerated in May and the rupiah's 5.9
percent decline in the past month threatened to make import costs
higher, fanning inflation. The rupiah's decline was aggravated by the
May rate cut and speculation that rising U.S. rates would draw funds
from global emerging market investments.
"Now that the rupiah has become volatile and fragile, Bank Indonesia
wants to maintain a good interest rate differential to attract
investors," said Fauzi Ichsan, chief economist at Standard Chartered
Plc, as quoted by Bloomberg. "The decision to cut rates last month was
premature, especially on the back of rising U.S. interest rates."
Remarks on Monday by the U.S. Federal Reserve Chairman Ben S. Bernanke
of a further increase in the U.S. rate have influenced Bank Indonesia's
decision.
"In the middle of a possible increase in the U.S. Federal Reserve
interest rate and a fluctuating rupiah, it's good to pause," Bank
Indonesia Deputy Governor Hartadi A. Sarwono said. "The most important
thing now is to maintain the public's confidence."
The central bank projects inflation to ease to 8 percent by year-end
from more than 17 percent last year. It expects the Southeast Asian
economy to expand by 5.4 percent this year, after growing by 5.6
percent last year.
The business sector has long called on the central bank to cut its
interest rate to make bank loans more affordable, thus allowing
companies to expand their operations and push consumption higher, key
factors to help accelerate economic growth.
"We want Bank Indonesia to cut rates to provide room for Indonesian
consumers to spend," said Benjamin Mailool, president of PT Matahari
Putra Prima, Indonesia's biggest retailer by sales, as quoted by
Bloomberg. "High interest rates will certainly pose difficulties for
consumers as their purchasing power declined after the government
raised fuel prices last year.".
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