May 6 (Bloomberg) -- Indonesia's central bank unexpectedly raised interest rates for the first time in more than two years to tame inflation and said it will consider further increases.

Bank Indonesia raised the benchmark rate used as a reference for bill sales to 8.25 percent from 8 percent, acting Governor Miranda Goeltom said in Jakarta today. The decision was predicted by just three of 18 economists surveyed by Bloomberg.

Soaring prices of food and kerosene propelled inflation to 9 percent last month in Southeast Asia's largest economy. Indonesia's government is preparing to increase fuel costs by as much as 30 percent, which may further stoke price gains.

``Bank Indonesia is taking a lead here,'' said Lim Su Sian, an economist with DBS Group Holdings Ltd. in Singapore. ``It's a signal that they are doing something to control prices, though their ability to bring inflation down is limited.''

Lim expects the central bank to raise its benchmark rate to 8.75 percent by the end of the year.

The Jakarta Composite Index fell 0.7 percent. The rupiah, which has declined 1.1 percent in the past six months, gained 0.2 percent to 9,210 against the dollar at 3:59 p.m. in Jakarta.

``Today's move suggests that Bank Indonesia's main policy concern has shifted from growth to inflation,'' Matt Hildebrandt, a Singapore-based economist at JPMorgan Chase & Co, said in a note to clients.

Bonds Rise

Ten-year bonds rose, halting three days of decline. The yield on the 9 percent note due September 2018 dropped 1 basis point to 12.87 percent, according to the Inter Dealer Market Association in Jakarta. A basis point is 0.01 percentage point.

``We have taken into account the proposed fuel-price increase,'' Goeltom told reporters in Jakarta today. ``Going forward, the challenge to economic stability is huge if commodity prices continue to rise and the risk of a global economic slowdown increase.''

China, India and Pakistan have raised borrowing costs this year as Asian nations grapple with record food and fuel prices. Philippine central bank Governor Amando Tetangco said today he would ``act decisively'' to contain inflation expectations.

The Reserve Bank of India on April 29 unexpectedly ordered lenders to set aside more funds for the second time in less than two weeks, raising its cash reserve ratio to 8.25 percent from 8 percent. China last month increased its limit for the third time this year to a record 16 percent.

Fuel Subsidies

``In order to maintain expectation ahead, Bank Indonesia will always adjust the BI Rate based on the direction of development of inflation,'' Miranda said in a statement.

Indonesia's Coordinating Minister for the Economy Boediono yesterday said the government plans to raise fuel prices in a ``limited'' manner to reduce its subsidy burden. The country's budget deficit may widen this year to 2.1 percent of gross domestic product from 1.7 percent without the price increase.

Indonesia, the only OPEC member in Southeast Asia, may leave the group as early as next year because shrinking production has made the country a net importer of oil, Energy Minister Purnomo Yusgiantoro said today.

The government, which more than doubled fuel prices in 2005, has refrained from raising tariffs since then as it prepares for national elections next year. The central bank last increased its policy rate, to 12.75 percent, in December 2005 after the increase in pump prices.

Slower Growth

Bank Indonesia acted ``not a moment too soon,'' said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore. The government's proposed fuel-price increase could add a further 3 percentage points to inflation this year, he added.

Inflation will be a key ``obstacle'' to growth this year, according to 46 percent of 100 economists and bankers surveyed by Bank Indonesia. Inflation is likely to exceed the government's 6.5 percent target this year, the survey showed.

Indonesia's economic growth may slow to 6 percent this year from a previous estimate of 6.4 percent as inflation continues to accelerate, Finance Minister Sri Mulyani Indrawati said today. Inflation may quicken to between 8.5 percent and 9 percent from the government's earlier estimate of 6.5 percent, she said.

A fuel price increase may force the central bank to raise borrowing costs, Destry Damayanti and Aldian Taloputra, economists at PT Mandiri Sekuritas in Jakarta said in a note to investors yesterday.

``Tighter monetary policy would be necessary to keep inflation expectations in check so that it does not affect actual inflation,'' Damayanti and Taloputra said in the note. Mandiri yesterday cut its growth estimate for Indonesia to 6 percent from its previous forecast of 6.2 percent.

To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net; Arijit Ghosh in Jakarta at aghosh@bloomberg.net.

Last Updated: May 6, 2008 07:24 EDT