BI holds key rate steady on inflation concerns

Urip Hudiono, The Jakarta Post, Jakarta

The central bank kept its key interest rate unchanged at 9 percent Thursday, marking a pause in its series of monthly reductions since July, on fears of a possible uptick in inflation ahead.

Bank Indonesia said, however, that its "neutral stance" on the rate -- used as a benchmark for bill sales and bank lending rates -- would not have any adverse effects on the economy, which it believed had grown by 5.4 percent during the first quarter.

Announcing the outcome of the central bank's board of governors' policy meeting and economic assessment Thursday, BI governor Burhanuddin Abdullah said inflation was expected to remain within its forecast range of 5 to 7 percent in 2007, and between 4 and 6 percent next year. However, he warned that inflationary pressures could yet gather steam.

"There are now indications that a number of consumer prices are exhibiting tendencies that need to be guarded against. Public expectations on inflation are also on the rise in line with the acceleration in domestic demand and economic growth," he said.

"We will hold the rate steady until these inflationary pressures have subsided."

The central bank last kept its rate steady in June, following a quarter percentage point cut the previous month. Since then, BI has steadily cut its rate amid easing inflation and the need to promote higher economic growth.

March's inflation figures were mixed, falling on a monthly basis to only 0.24 percent from February's 0.62 percent, yet rising on an annualized basis to 6.52 percent as compared to 6.3 percent in February.

The economy grew slightly more slowly last year than in 2005, by 5.5 percent compared to 5.6 percent.

Miranda S. Goeltom, BI senior deputy governor, said that the pause in the rate-cut cycle did not run counter to the effort to bring down bank lending rates to more affordable levels for borrowers.

The pause, she said, was balanced by recent regulations issued by the government and the central bank designed to relax lending rules and hopefully encourage more borrowing, and hence growth, on the part of the real sector.

"It is expected that the inflationary pressures will subside during the course of the pause as the real sector responds to the new policies," she said.

"The BI rate is just one factor that affects lending rates. In addition, banking-sector efficiency and the overall investment climate need to be improved."

BI recently relaxed its rules on new borrowing by existing large-scale defaulters in an effort to encourage more bank lending, particularly to small businesses.

Bank lending grew by a less-than-expected 14 percent to Rp 792.3 trillion last year, compared to growth of more than 20 percent in previous years, as many businesses were reluctant to borrow due to persistently high bank lending rates and stagnant market demand.

Lending in February increased by a disappointing Rp 8.9 trillion to Rp 826.3 trillion, compared to an increase in January of Rp 15.5 trillion. Meanwhile, the level of non-performing loans in the banking industry stood at 3.4 percent.

Regarding BI's economic assessment, Burhanuddin said that a strong export performance and a pick-up in private investment should keep growth on track at between 5.7 and 6.3 percent in 2007, and between 5.7 and 6.7 percent in 2008.

A good export performance is believed to have produced a US$3.3 billion surplus in Indonesia's balance of payments as of the end of March, which would increase the country's foreign exchange reserves to US$47.2 billion.