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Indonesia Keeps Key Rate at Record Low to Spur Growth

Indonesia’s central bank left its benchmark interest rate at a record low for a ninth straight month today as a strengthening currency helped keep inflation below 4 percent.

Bank Indonesia maintained its reference rate at 6.5 percent, it said in a press statement in Jakarta today. The decision was predicted by all 20 economists in a Bloomberg News survey. The measure is at the lowest level since it was introduced in July 2005.

Indonesia is a standout in a region where central banks from India to China are either raising interest rates or ordering banks to hold more assets in reserve to fight inflation and avert asset bubbles. Consumer prices in Southeast Asia’s largest economy rose 3.91 percent in April, a report showed earlier this week.

“Inflation tends to accelerate but will likely remain within the expected range,” said Anton Gunawan, an economist at PT Bank Danamon Indonesia in Jakarta. “It’s not like in other countries where the difference between the inflation rate and the interest rate is slim, so they must either raise the rates or, like China, tighten reserve requirement.”

The country’s inflation is below Bank Indonesia’s target range of between 4 percent and 6 percent this year. The central bank may keep its policy rate unchanged through the end of the year should inflation remain “within its expectations,” Senior Deputy Governor Darmin Nasution said this week.

World Bank Post

“We just don’t see any reason for Bank Indonesia to raise rates as the inflation outlook remains benign going forward,” Juniman, an economist at PT Bank Internasional Indonesia, said before the decision.

Bank Indonesia’s monetary policy decision came hours after Sri Mulyani Indrawati, the country’s finance minister and a potential candidate to head the central bank, was appointed to a top post at the World Bank.

Sri Mulyani will start June 1 as one of the Washington- based bank’s three managing directors, the highest rank under President Robert Zoellick, according to an e-mailed statement from the World Bank.

The rupiah’s 14 percent gain in the past year has made it Asia’s best-performing currency, helping cool import costs and contain inflation. It fell 0.8 percent to 9,103 per dollar as of 4:09 p.m. in Jakarta. The main stock index declined 3.8 percent as Sri Mulyani’s appointment left unclear who would replace her as finance chief.

Australia, China

Australia’s central bank yesterday increased its benchmark interest rate for the sixth time since early October after policy makers raised their outlook for inflation and judged the nation is insulated from Greece-sparked debt woes.

India, Vietnam and Malaysia have also increased borrowing costs in recent months, and China on May 2 asked lenders to set aside more money as reserves for the third time this year.

In Indonesia, 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. The central bank forecasts the economy will expand 5.6 percent this year.

“The current policy rate is conducive given the economic growth and inflation forecasts,” said Purbaya Yudhi Sadewa, an economist at PT Danareksa Research Institute in Jakarta.

Bank Earnings

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 ($236 million) 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. Car and motorcycle revenue at PT Sinar Mitra Sepadan Finance, a financing company, is expected to increase to 3.7 trillion rupiah this year from 1.7 trillion rupiah in 2009, said President Director Rudyanto Somawihardja.

The low-interest-rate regime and high economic growth rate should boost the purchasing power of many Indonesians, said Jastiro Abi, finance director at PT Bakrie Telecom, an Indonesian mobile-phone operator.

“It’s good for industry, including the telecommunication industry, and Bakrie Telecom will have positive growth both in revenue and net income,” Abi said in a telephone interview today.

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