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Indonesia's central bank raised its key interest rate on Tuesday for the sixth time this year to curb inflation and underpin its currency, but some analysts said the rise will be the last in 2008 as the global credit crisis looms.
Markets globally are starting to price in the risk of rate cuts, possibly co-ordinated, from the world's major central banks as they scramble for ways to combat the global credit crisis. That risk was boosted earlier on Tuesday when Australia's central bank slashed its rates by 100 basis points to 6.0 percent, although the Bank of Japan kept its overnight call rate target unchanged at a lowly 0.5 percent.
However, faced with September annual inflation at a 2-year high of 12.14 percent, Bank Indonesia (BI) raised its overnight policy rate by 25 basis points to 9.50 percent to take accumulated rises this year to 150 basis points. Christy Tan, currency strategist at Bank of America, said Bank Indonesia was now probably the last central bank in Asia still on a tighter monetary policy path.
"I would have expected this move under normal market conditions and the higher inflation print. But there is concern now that BI may be underpricing the impact of global financial turmoil on (the) domestic economy," she said.
Indonesian stocks, which slumped 10 percent on Monday, were flat in early afternoon trade on Tuesday. The rupiah hit a three-year low of 9,730 against the dollar in early trade but rebounded before the rate decision after suspected central bank intervention.
A Reuters poll conducted after the release of September inflation data on Monday showed analysts were split between a rate rise and the central bank leaving rates steady.
Bank Indonesia Governor Boediono said inflationary pressures should come down. "We are still targeting 6.5-7.5 percent in 2009, helped by declining commodity prices," he, adding that this year's target of 11.5-12.5 percent was also achievable.
While oil prices have come off their record highs, Indonesia typically sees upward pressure on consumer prices during the fasting month of Ramazan, which this year fell in September.
"While BI has hiked rates this round, it is most likely the last of the measured rate hikes seen since May this year," said Joanna Tan, an economist at Forecast Pte Ltd in Singapore. "While admittedly we have not seen the last of inflation woes, the more pressing issue has shifted to growth now. The coming monetary meets should see the central bank holding the policy rate steady at 9.50 percent," she said.
President Susilo Bambang Yudhoyono on Monday held a special meeting to discuss the impact of the global crisis and said he did not see a repeat of the Asian financial crisis that hit Indonesia a decade ago, citing better economic fundamentals and political stability.
Indonesia was the hardest hit by the Asian financial crisis due in part to large corporate foreign debt and a weak banking system. Political upheaval also meant it took longer for the country to recover. Indonesia's economy grew 6.3 percent last year, the fastest in more than a decade, aided by exports of commodities including palm oil, rubber, gas and a steady drop in interest rates. Analysts, however, expect global demand for key exports of commodities and mining products, to be hit by the credit crisis.

Copyright Reuters, 2008

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