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INDONESIA KEEPS MAIN INTEREST RATE AT RECORD-LOW 6.5%

By NBF NEWS
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Indonesia's central bank kept its benchmark interest rate at a record low for an eighth straight month, judging that inflation isn't yet enough of a threat to require higher borrowing costs, Bloomberg said on Tuesday.

Bank Indonesia kept its reference rate at 6.5 per cent, the lowest level since the measure was introduced in 2005, Darmin Nasution, senior deputy governor at the central bank, said at a press briefing in Jakarta today. The decision was predicted by all but one of 19 economists in a Bloomberg News survey.

Indonesia is benefiting from Asia's top-performing currency against the dollar over the past year, helping keep inflation under 4 percent on average compared with 10 per cent the previous decade. President Susilo Bambang Yudhoyono is instead focused on boosting development in the world's fourth most populous nation, urging banks to boost lending and raising spending to help narrow the growth gap with China and India.

'Indonesia is likely to continue to hold interest rates steady for a while with the main objective of supporting credit growth,' said Rahul Bajoria, an economist at Barclays Capital in Singapore. 'They don't have inflationary pressures right now, compared to, say, Vietnam, India or Australia. They can afford to stay on hold for a while to support demand.'

Indonesia has stood out among several of its Asian peers, with Malaysia and India raising borrowing costs earlier this year, Vietnam moving in 2009 and China ordering its banks to hold more assets in reserve. Australia today boosted its main rate a fifth time since early October.

The country, which avoided a recession last year as neighboring economies including Malaysia, Thailand and Singapore contracted, already has one of Asia's highest benchmark rates, helping stoke gains in the rupiah.

Malaysia's key rate is 2.25 per cent, Thailand's is 1.25 per cent, while the Philippines's main rate is 4 percent.

The rupiah has climbed more than 25 per cent in the past 12 months against the dollar, to 9,050 as of 5:10 p.m. in Jakarta, its strongest close since July 2007. The benchmark stock index slipped 0.2 per cent today from its record close yesterday.

Bank Indonesia sees room for the currency to strengthen further, Deputy Governor Budi Mulya said in Jakarta today. Fellow Deputy Governor Hartadi A. Sarwono said in Nha Trang, Vietnam, that the rupiah's gains are 'helping to reduce or mitigate the pressure of inflation' in Southeast Asia's largest economy. There is no pressure to raise interest rates, he said.

'We are fine on inflation right now,' Sarwono said. 'If you look at the interest-rate differential, Indonesia still has quite a big margin so it is profitable for' investors to come in, he said.

Consumer prices may rise 4.8 per cent this year, assuming no 'administrative price' increases, Nasution said today, referring to government-influenced costs such as electricity and fuel. Indonesia doesn't see an 'urgent' need to raise interest rates if inflation hovers at about 5 per cent to 6 per cent, Sarwono said on March 22.

'With the policy rate at the current level, it is conducive enough to boost economic growth,' said Jahja Setiaatmadja, vice president director of PT Bank Central Asia in Jakarta. The bank may raise its 2010 loan growth target to 20 per cent from its original forecast of 15 per cent, Setiaatmadja said.

Policy makers have prodded the nation's banks to reduce their lending charges after the central bank's rate cuts last year. The average lending rate at Indonesian banks fell to 15.18 percent on April 5 from 16.01 percent in early March, according to data from the central bank.

Indonesia's $514 billion economy is forecast to expand 5.6 per cent this year after growing 4.5 per cent in 2009, Sarwono said last month. Yudhoyono has pledged to double spending on roads, seaports and airports to $140 billion over the next five years to help deliver average growth of 6.6 per cent over the remainder of his term ending in 2014.

'With more positive economic growth this year, it will mean more business for financing companies like us,' said Suwandi Wiratno, president director of PT Wahana Ottomitra Multiartha, the motorcycle financing unit of PT Bank Internasional Indonesia.

Wahana Ottomitra expects lending to increase to 5.8 trillion rupiah ($641 million) this year from 4 trillion rupiah in 2009, as the company aims to sell 560,000 units of motorcycles in 2010 from about 390,000 units last year, he said.

Indonesia slashed the benchmark rate by 3 percentage points from December 2008 to August last year, keeping it at 6.5 per cent since then even as Australia, India, Vietnam and Malaysia increased borrowing costs to fight inflation and avert asset bubbles.

The Reserve Bank of India last month increased its benchmark rates by a quarter point, saying containing inflation had become 'imperative.' Malaysia raised borrowing costs in March and Australia today boosted its overnight cash rate target to 4.25 per cent from 4 per cent.