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Wednesday, February 08, 2006

BI keeps key interest rate unchanged

Upbeat that inflation will eventually subside over the course of the year, the central bank has left its key interest rate unchanged at 12.75 percent in a move that should help avert a further slowdown in economic growth.

"Macroeconomic stability has been maintained, relatively speaking, with inflation under control, the rupiah gaining strength, and the banking sector still performing quite satisfactorily -- all of which are as we expected," the Bank Indonesia Board of Governors said in a statement after their monthly meeting to assess the economy Tuesday.

The central bank kept its BI rate unchanged last month, hinting at the beginning of the end of its monetary tightening, which began last July, after consumer prices fell by 0.04 percent in December.

Following December's deflation, monthly inflation of 1.36 percent in January, however, stoked fears that the central bank might tighten its monetary policy once again by further raising the key interest rate. BI Governor Burhanuddin Abdullah had also said that the central bank still regarded inflationary pressures as high, despite the rupiah's recent strengthening against the U.S. dollar.

Analysts had, nevertheless, expected BI to continue tempering its monetary policy, given that inflation was being brought under control with the current interest rate. The government is expecting full-year inflation of 8 percent, with BI allowing a plus-minus range of 1 percent.

Mandiri Sekuritas chief economist Kahlil Rowter, who had forecast that BI would leave its rate unchanged, said the decision was also due to the fact that rupiah-denominated assets were now more attractive than dollar-denominated ones.

Given the current BI rate, the U.S. Federal Reserve rate of 4.5 percent, and their respective yields, Kahlil said the real interest rate differential between the rupiah and dollar assets was between 0.6 and 1 percent.

"This range is within BI's comfort zone and enough to attract investors. And with the rupiah recently gaining against the greenback, there is no need for BI to raise its rate," he said.

Despite continuing moderation in its monetary policy, BI has warned of various external and internal factors that could disrupt macroeconomic stability and economic growth over the coming months.

"Inflation has been contained, but there are still risks to the economy. Externally, there exists the risk of volatility in the prices of oil and other commodities, as well as a possible slowdown in the global economy," Burhanuddin told reporters after the board's meeting.

Meanwhile, adverse factors at home included the poor investment climate and defective taxation system, both of which were hampering growth in the real sector.

Urip Hudiono, The Jakarta Post, Jakarta
February 08, 2006

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