Sept. 3 (Bloomberg) -- Indonesia’s central bank refrained from cutting its benchmark interest rate for the first time in ten months, judging that faster inflation is now a bigger risk than slowing growth.

Bank Indonesia maintained its reference rate at 6.5 percent, according to a statement in Jakarta today. The decision was predicted by 28 of 31 economists in a Bloomberg News survey. The others expected a quarter-point cut.

Central banks across Asia have started to signal they may soon need to raise borrowing costs as stimulus spending worth more than $950 billion revitalizes their economies and threatens to stoke prices. President Susilo Bambang Yudhoyono said in last month’s budget that Indonesian policy makers are committed to “protect” the poor against inflation.

Bank Indonesia’s decision was “consistent with the inflation outlook,” Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France’s Credit Agricole SA, said before the statement was released. “It also reflects increased confidence in the recovery.”

Indonesia’s central bank cut its key interest rate nine months in a row from December to August, bringing the cumulative monetary policy easing to 300 basis points.

Falling borrowing costs have helped buoy Indonesia’s $514 billion economy, which expanded 4 percent in the second quarter from a year earlier. The government expects growth of 4.3 percent in 2009 and the parliament today agreed to set a target of 5.5 percent next year.

‘Gaining Ground’

“The momentum of domestic economic growth is gaining ground,” the central bank said in today’s statement. “Consumer spending is increasing, spurred by the availability of financing and confidence in future economic prospects.”

Consumer confidence in Indonesia rose in July to the highest level since 2004, according to a survey conducted by the central bank. The Bank Indonesia gauge fell last month to 114.3 from 115.4.

Bank Indonesia also said today it would offer a three-month repurchase facility to commercial lenders from Sept. 7 in order to ensure the availability of liquidity in the financial system.

The central bank will no longer focus on “signaling” its benchmark interest rate as a means to boost banks’ lending, Deputy Governor Hartadi Sarwono told reporters in Jakarta today. Bank Indonesia will instead “monitor” the implementation of a recent accord among banks to reduce deposit rates, he said.

Deposit Rates

Indonesia’s 14 main banks made an agreement with the central bank on Aug. 20 to cut their deposit rates, a move that policy makers said should lead to lower lending rates.

Government stimulus spending is also supporting economic expansion. President Yudhoyono’s administration has unveiled measures worth 73 trillion rupiah ($7.2 billion) to shield Indonesia from the global recession.

Cement sales in Indonesia may fall at a slower pace in the second half because of a possible increase in spending on infrastructure projects, said Christian Kartawijaya, finance director of PT Indocement Tunggal Prakarsa, the nation’s second- largest cement maker.

Neighboring Malaysia and Thailand have slid into recession as their export-dependent economies were pummeled by the worst worldwide slump since the Great Depression. Malaysia’s economy shrank 3.9 percent in the second quarter from a year earlier while Thailand’s gross domestic product declined 4.9 percent.

Policy Challenge

Inflation in Indonesia accelerated in August for the first time in 11 months, with consumer prices rising 2.75 percent from a year earlier. Prices increased 0.56 percent last month from July, the biggest gain since 2008.

Deputy Governor of Bank Indonesia Budi Mulya said in Bandung last month that managing inflation would be a “challenge” for policy makers next year.

The central bank expects inflation in 2010 of between 4 percent and 6 percent, according to today’s statement.

“Bank Indonesia doesn’t have room to cut interest rates further without undermining inflation credibility and macro stability concerns,” said Johanna Chua, head of Asian economic research at Citigroup Inc. in Hong Kong. “We expect the central bank to start hiking in the first quarter of 2010.”

To contact the reporters on this story: Aloysius Unditu in Jakarta at aunditu@blomberg.net Novrida Manurung in Jakarta at nmanurung@bloomberg.net

Last Updated: September 3, 2009 03:37 EDT