Indonesia May Hold Rates as Rupiah’s Strength Tackles Inflation

By Aloysius Unditu and Michael Munoz

May 4 (Bloomberg) — Indonesia’s central bank may keep its benchmark interest rate at a record low this week as a strengthening currency and rising food supplies keep inflation at “moderate” levels.

Bank Indonesia will keep its reference rate unchanged at 6.5 percent for a ninth consecutive month tomorrow, according to all 20 economists in a Bloomberg News survey. The measure is at the lowest level since it was introduced in 2005.

Inflation in Southeast Asia’s largest economy stayed below 4 percent last month as rice harvests boosted supplies and a 4 percent gain in the rupiah this year reduced import costs, a report showed yesterday. That makes Indonesia a standout in a region where inflation has accelerated and central banks from India to China are either raising interest rates or ordering banks to hold more assets in reserve.

“Moderate inflation is allowing Bank Indonesia to be patient,” said David Cohen, an economist at Action Economics in Singapore. Still, “a gradual rise in inflation from the current year-on-year pace will likely prompt them to begin raising rates before yearend in an effort to remain ahead of the inflation curve,” he said.

Bank Indonesia may keep its policy rate unchanged through the end of the year should inflation remain “within its expectations,” Senior Deputy Governor Darmin Nasution said in Jakarta yesterday.

President Susilo Bambang Yudhoyono is focused on boosting development in the world’s fourth most populous nation, urging banks to increase lending and raising spending to bolster growth.

‘Tame Inflation’

The rupiah is the best performing currency in Asia this year against the dollar after the Malaysian ringgit and the Indian rupee. The Jakarta main stock index has gained 17 percent this year.

“Given the tame inflation and the rupiah’s appreciation against the dollar, we think there will be no change in Bank Indonesia’s monetary stance,” Aldian Taloputra, an economist at PT Mandiri Sekuritas in Jakarta, wrote in a note yesterday.

Australia, India, Vietnam and Malaysia have increased borrowing costs to fight inflation and avert asset bubbles, and China on May 2 asked lenders to set aside more money as reserves for the third time this year.

Low borrowing costs have benefited Indonesian companies and banks including PT Bank Mandiri and PT Bank Rakyat Indonesia. Bank Rakyat, the country’s second-largest lender by assets, said last week first-quarter net income rose 25 percent to 2.15 trillion rupiah as lending increased.

Car sales may grow 10 percent this year, helped by low lending rates, the country’s biggest auto dealer, PT Astra International, said in March.

“Low inflation means people have more purchasing power and they will have more to spend, including buying cars and motorcycles,” said Juniman, an economist at PT Bank Internasional Indonesia in Jakarta.

To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net: Michael Munoz in Hong Kong at mjmunoz@bloomberg.net

Last Updated: May 3, 2010 13:00 EDT