CORRECTED-UPDATE 1-Bank Indonesia holds rate again, sees inflation in check

Thu Mar 7, 2013 3:39am EST

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(Corrects sixth paragraph to add the word billion)

By Rieka Rahadiana

JAKARTA, March 7 (Reuters) - Indonesia's central bank left its benchmark interest rate unchanged at a record low 5.75 percent, as expected, saying it expects price pressures to ease after inflation hit a 20-month high in February.

Bank Indonesia (BI) reiterated that it will maintain the stability of the rupiah, which has been under pressure since last year because of the country's trade and current account deficits.

All 13 economists surveyed by Reuters before Thursday's announcement had expected the benchmark policy rate to be held.

BI, which also held its deposit facility rate unchanged, said the current policy rate is consistent with its inflation targets and that it expects inflationary pressures to ease as the harvest season is under way.

Some analysts have been calling for Bank Indonesia to start raising interest rates to keep inflation in check and bolster the rupiah, which was emerging Asia's weakest currency last year, sliding about 6 percent against the dollar.

The rupiah, which has weakened about 0.6 percent against the dollar this year, did not move from 9,690 per dollar after the central bank's decision. It also did not react immediately to announcement of the end-February foreign exchange reserves, which fell to $105.2 billion from $108.8 billion a month earlier.

"The fall in FX reserves seems to indicate that they have been more active to supply U.S. dollars in the market," said Gundy Cahyadi, an economist at OCBC Bank in Singapore.

In keeping the policy rate at the record low, BI is helping prop up economic growth, which has been above 6 percent a year.

The central bank said it expects 2013 economic growth to be at the bottom end of its range of 6.3-6.8 percent range.

Gareth Leather of Capital Economics said given the uncertain global outlook and "provided that inflationary pressures remain contained", interest rates will remain on hold the rest of 2013 and that policy tightening will likely begin in 2014.

FOOD PRICES UP IN FEBRUARY

The statistics bureau reported higher-than-expected annual headline inflation of 5.3 percent in February, a 20-month high, after restrictions on some food imports pushed prices higher.

Core inflation, which exclude volatile foods and administered prices, declined slightly from January to 4.29 percent.

Indonesia has been containing inflation by continuing to subsidise fuel costs, though that has meant heavy government spending on subsidies.

Many economists say the subsidies must be cut, but President Susilo Bambang Yudhoyono is reluctant to cut them, especially with national elections due next year.

In January, the trade deficit narrowed to $170 billion from a revised $190 billion for December.

Thursday's rate-policy meeting came amid a process to change the country central bank's governor.

Yudhoyono has nominated Finance Minister Agus Martowardojo to replace Darmin Nasution when his term ends in May. Parliament needs to approve the appointment, and some members oppose Martowardojo, whose nomination was rejected in 2008.

On Tuesday, Martowardojo cleared the first hurdle as a parliamentary commission agreed his nomination could be considered. A hearing on his nomination will be held on March 25-26. (Additional reporting by Fathiya Dahrul and Andjarsari Paramaditha in Jakarta; Editing by Richard Borsuk)

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