Indonesia's central bank said it will keep policy rates at a record low throughout 2010 if inflation is on target, but investors were convinced price pressures will take off and a rate rise in the first half of next year was inevitable.
Senior deputy governor and currently acting governor Darmin Nasution had raised the prospect on Wednesday the central bank may leave rates where they are in 2010 given inflation is forecast to be within of its target of 4-6 percent next year. Bank Indonesia (BI) said in a statement after its monthly policy meeting on Thursday it had left rates on hold at 6.5 percent, as expected, and signalled it was likely to leave them there if inflation plays out as forecast.
But analysts were unconvinced. "I don't think rates will stay on hold in 2010. That will see inflation build up in the economy and create pressures down the line," said Prakriti Sofat, regional economist at Barclays Capital in Singapore. "In our opinion, the risks to inflation are biased to the upside and we expect CPI to end 2010 at 7 percent."
Markets were mostly unfazed by the rate announcement, as they were on Wednesday following comments from Nasution, who is seen as a dove among the senior central bankers. The rupiah firmed slightly, while stocks extended gains to more than 1 percent on the news. Short- and mid-term bond yields were largely unchanged while long end of the curve rose slightly in thin trade, a trader said. "We also see that the BI rate level of 6.5 percent is still consistent with 2010 inflation target of 4-6 percent," BI said, adding its 2011 inflation target was in the same range.
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