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Indonesia May Raise Rate If Core Inflation Above 5%

Dec. 22 (Bloomberg) -- Bank Indonesia “won’t hesitate” to raise its benchmark interest rate from a record low if core inflation exceeds 5 percent, Deputy Governor Hartadi Sarwono told reporters in Jakarta today.

Core inflation is currently at about 4 percent, Sarwono said. December inflation may be about 6.5 percent to 6.6 percent from a year earlier, he said. That’s more than the 6.33 percent gain in consumer prices in November.

“Real interest rates remain slightly positive and in the light of concern rate hikes may attract speculative capital inflows, we believe Bank Indonesia could wait until end of first quarter or start of second quarter 2011 before beginning to normalize policy rate,” Philip McNicholas and Richard Jerram, economists at Macquarie Group Ltd., wrote in a note yesterday.

Bank Indonesia has refrained from raising interest rates from a record low of 6.5 percent this year, delaying an increase that could attract more funds at a time when emerging markets are luring investors away from developed economies. The central bank has ordered lenders to set aside larger reserves, aiming to rein in liquidity without hurting the nation’s economic expansion.

Inflationary pressure will likely continue next year, Governor Darmin Nasution said Dec. 1. Indonesian lawmakers this month approved a government proposal to limit the sale of subsidized fuel in 2011, increasing the risk of further price gains. The timing of the policy’s implementation is important to keep inflation in check, Sarwono said today.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Berni Moestafa in Jakarta at bmoestafa@bloomberg.net

To contact the editor responsible for this story: Greg Ahlstrand at gahlstrand@bloomberng.net

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