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Bank Indonesia kept its benchmark interest rate at 8.25
percent for the fourth consecutive month Tuesday amid growing concern
over the impact of high oil prices on the economy.
Central bank director Made Sukada said the bank's board felt it
necessary to maintain the rate at the current level to curb
inflationary pressure resulting from soaring oil prices.
"Current conditions require us to maintain it at that level," Made
Sukada said.
He said the decision to hold the interest rate would not affect the
government's economic growth target.
The Jakarta Composite Index added 29.42 points, or 1.1 percent, to
close at 2,681.90 on Tuesday on expectations a decision by the central
bank to keep its rate unchanged would help curb rising prices and
stabilize the economy.
In a similar mood, the rupiah rose to 9,125 against the dollar as of
4:56 p.m. in Jakarta, from 9,160 on Monday.
Although state oil company Pertamina's recent decision to raise the
price of fuel for business in response to a surge in global crude oil
prices could result in stronger inflationary pressure, the central bank
is upbeat this year's annual inflation target of 5 to 7 percent can be
achieved, Made said.
Consumer prices in Indonesia increased 6.9 percent in October from a
year earlier, following a 6.95 percent gain in September. That was
faster than the 6.8 percent estimated by economists.
Made hoped the central bank's move to hold interest rates would ease
inflationary pressure in November.
"For 2008, we need to see if oil prices continue to rise," he said.
Before it paused in its series of rate cuts in July, the bank had
reduced its key rate by a cumulative 450 basis points since May 2006 to
8.25 percent.
Interest rates were originally hiked dramatically when the government
cut fuel subsidies in 2005, triggering a spike in inflation.
The central bank does not have "enough room to cut rates because
inflation is too close to a year-high", said Purbaya Yudhi Sadewa,
chief economist at PT Danareksa Sekuritas in Jakarta.
"By stabilizing inflation, hopefully everything else, including the
rupiah, will move on fundamentals."
Bank Indonesia Governor Burhanuddin Abdullah, who Tuesday expressed
"concern" about imported inflation, chose to keep interest rates
unchanged to gauge the impact of unprecedented crude oil prices on the
economy.
Bank Indonesia has reduced borrowing costs 13 times since May 2006.
"Inflation has been surprising on the upside," said Prakriti Sofat, an
economist at HSBC Holdings Plc in Singapore.
"The run-up in oil prices is only adding to the upward pressure on
inflation," he told Bloomberg
Oil reached a record US$96.24 a barrel on Nov. 1. It rose as much as 55
cents, or 0.6 percent, to $94.53 a barrel in after-hours electronic
trading on the New York Mercantile Exchange.
Indonesia caps oil costs for consumers, while companies have to pay the
market price.
"On the negative side, imported inflation will be a matter of concern,"
Abdullah told reporters in Jakarta on Tuesday. "What needs to be
considered is how big, how long the increase in oil prices will last."
The central bank's move to reduce borrowing costs by 4.5 percentage
points since May 2006 has helped boost lending growth. Credit increased
21.5 percent in October from a year earlier, Bank Indonesia said.
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