Jakarta, Aug 5 (ANTARA) - The Indonesian central bank (Bank Indonesia/BI) on Tuesday raised its benchmark interest rate (BI rate) by 25 basis points from 8.75 percent to 9.00 percent in an effort to offset the upward trend in inflation and to keep its rate within a targeted range.
The government is determined to maintain the year-on-year inflation rate at 11.25 percent and is thus carrying out an inter-departmental coordination in an effort to achieve the inflation target of 11.25 percent by year end.
However, the BI saw inflationary pressures that could emerge until the end of 2008, prompting its board of governors to decide to raise the BI rate to 9.00 percent on Tuesday.
BI said in press statement that it had raised its BI rate in an effort to stabilize the economic financial system and to support the mid-term inflation target.
According to BI Governor Boediono, BI still saw risks of inflationary pressures in the future which originated from world oil and food price fluctuations and pressures of demand.
By raising its reference rate and taking into account several risk factors as well as inflationary pressures that were likely to emerge, BI hoped it would help curb inflation and predicted that the year-end inflation would be recorded at a range between 11.5 and 12.5 percent.
In a statement, the BI said the increase in the central bank's benchmark interest rate by 25 basis points to 9.00 percent would not affect Indonesia's economic activities.
There were indicators showing that domestic demand was still strong and the banking industry's resilience had remained under control supported by a good implementation of banks' intermediary functions.
BI Governor Boediono said year-on-year bank credits had still grown by 31.6 percent while the gross amount of non-performing loans (NPLs) had dropped to 4.08 percent.
He predicted that Indonesia's economy in 2008 would still grow well supported by export growth, public consumption spending and relatively high government expenditure.
The domestic demand would also be supported by an increase in regional spending and the start of the 2009 general election preparations.
In the meantime, Indonesia's balance of payments was also expected to perform better so that the stability of currency exchange rates would also be well maintained.
Foreign exchange reserves up to the end of July 2008 stood at US$60.56 billion or equivalent to the amount needed to finance 4.7 months of imports and payment of the government's external debts.
According to Boediono, the relatively high risks of inflationary pressures had been taken by BI to increase its BI rate this month, despite the fact that the impact of the fuel oil price hikes on inflation had been significantly reduced.
The BI governor said in order to make the monetary policy effective, the BI rate increase was followed by the optimizing of other monetary instrument policies such as taking under control the volatility of currency exchange rates and the absorption of liquidity excesses through open market operations.
"With the policy, the 2009 inflation rate target of 6.5 - 7.5 percent is expected to be achieved," he said.
The BI's step to raise its benchmark interest rate on Tuesday had been predicted.
State-owned BNI economist Ryan Kiryanto said last week that BI would likely raise its rate by 25 basis points to 9.0 percent this month following monthly and year-on-year inflationary pressures in July which reached 1.37 percent and 11.9 percent respectively.
He said BI would likely take the step to offset the upward trend in inflation which was expected to be fueled by seasonal factors in the coming months.
"But it is believed that the BI rate increase will not shock the market because banks and the real sector can understand the background conditions of such a policy," Kiryanto said.
BI decided early last month to raise its benchmark interest rate by 25 basis points to 8.75 percent in a widely-expected move to curb the accelerating inflation.
Inflationary pressure in 2008 was particularly the result of fuel oil and food price hikes. It noted that the inflationary pressure also resulted from rising demands due to a rise in the amount of bank loans and money supplies until the second quarter of this year.
The inflation rate in July 2008, fueled by price increases in groups of goods and food as well as groups of services such as education, recreation and sports was recorded at 1.37 percent.
"This is actually an annual cycle which was previously predicted to occur," Head of the Central Bureau of Statistics (BPS) Rusman Heriawan said on Friday. Thus, he said, the calendar year inflation is recorded at 8.85 percent and year-on-year inflation rate at 11.9 percent. (T.A014/A/HAJM/a/s012) 05-08-2008 19:27:11
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