Indonesia's central bank reiterated on Friday that it sees no need to change interest rates in 2010 because inflation would be within its target band of 4 percent to 6 percent this year and next. The remarks came after South Korea's central bank increased interest rates for the first time since the start of the financial crisis, raising market expectations that other Asian central banks will follow.
Acting governor Darmin Nasution said inflation is likely to slow in the fourth quarter, while deputy governor Budi Mulya said stable core inflation and the possibility commodity prices might come down later in the year would help the central bank achieve its inflation target of around five percent for 2010 and 2011.
"We are not thinking of adjusting our policy rate," Mulya told reporters. "At the very least, we are confident that inflation will be in line with the outlook and range that we have set," he later told Reuters in an interview. Indonesia kept its rate at a record-low 6.5 percent this week and analysts said they anticipated a hike in the fourth quarter or in the first quarter of next year to avoid falling behind in controlling inflation.
June inflation came in at 5.05 percent year-on-year, the highest since May 2009 and above forecasts of 4.46 percent. "The high inflation pressure is not a monetary phenomenon, but it's because of supply and distribution," Nasution said. "Inflation pressure will likely remain quite high in the next two to three months but it will likely ease in the fourth quarter."
Mulya said in the interview an anticipated appreciation of the rupiah and an expected fall in commodity prices due to a possible slowdown of growth in China would help keep prices in check for the rest of 2010. He expects the rupiah to strengthen further this year and said the bank would intervene to keep volatility at a minimum.
Mulya also said he expected Southeast Asia's largest economy to win investment grade status from rating agencies early next year. Indonesia is rated one notch below investment grade by Fitch while Moody's and S&P have it at two notches below.
In anticipation of the rating upgrade and continuing capital inflows, the rupiah has gained nearly 4 percent against the dollar since the start of the year, making it the third-best performer in Asia after the Japanese yen and Malaysian ringgit.
"We try to keep the rupiah in line with the fundamentals of the economy," Mulya said. "We are always in the market ... we would like to make the rupiah move with minimal volatility." Mulya also said that accelerating loan growth was not a concern and would not affect inflation as there was enough capacity to address additional demand.
The central bank is forecasting a 22-24 percent growth in bank loans this year but Mulya said he expects most banks are aiming to boost their lending higher than 24 percent. "We are expecting the banks to have a lending growth target of more than 24 percent. But we are still confident with our inflation target because we still have a substantial output gap to accommodate higher demand," he added.
Mulya said Indonesia's economy was likely to grow 5.9 percent year on year in the second quarter, faster than 5.7 percent recorded in the first quarter, which was the highest annual growth since the third quarter of 2008. Full year growth is also likely to be 5.9 percent, Finance Minister Agus Martowardojo said in Jakarta on Friday, slightly above the government's 5.8 percent target in its 2010 budget.
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