Indonesia rates unchanged; central bank plays down price risk

JAKARTA: Indonesia's central bank kept interest rates unchanged as expected but emphasised that subdued price pressures meant inflation this year would be at the lower end of its target range, signalling it was in no rush to raise rates.

Most analysts expect the central bank to start tightening policy by the end of 3Q as price pressures filter through, but the latest dovish comments appear to be stronger than in recent weeks.

"The board of governors expect there will be no significant inflation pressure in the first half," the central bank, Bank Indonesia, said in a statement after Tuesday's (April 6) rate meeting.

"For the whole 2010, the board of governors expect inflation pressure to remain low and tending to the lower end of the 4% to 6% target."

The rupiah was steady at 9,040 per dollar after the news, while the stock market was also barely changed after the lunchtime break. Shares hit a record-high earlier on Tuesday (April 6).

Bonds were flat with the 10-year yield quoted around 9.04%, unchanged from Monday, a trader in Jakarta said.

"We still maintain our view that the BI rate will be increased this year," said Eric Alexander Sugandi, an economist at Standard Chartered in Jakarta.

"But recent comments from BI on inflation at the lower end could mean the bank would maintain the rate at 6.5% for as long as possible to support growth."

Local currency government bonds have rallied this year on the prospect of an investment rating upgrade and a steady rupiah, but expensive valuations and investor expectations of rate hikes suggest further gains may be limited.

The central bank reiterated on March 22 that rates were likely to stay unchanged this year, even as most analysts see rates going up in 2H2010.

However, the consensus of a Reuters poll before Tuesday's decision to keep rates unchanged showed that Bank Indonesia would start to raise borrowing costs by the end of September to 6.75% and by another 25 basis points to 7% by the end of the year. The results of the latest poll were in line with a previous Reuters poll on March 3.

Bank Indonesia cut its rate by a total of three percentage points between December 2008 and August 2009 amid the financial crisis. It has since left it at a record low of 6.5%. – Reuters

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