Mansek BI kept benchmark rate unchanged at 6.5%

Bank Indonesia kept the benchmark rate unchanged at 6.5%in yesterday governor board meeting,inline with our and consensus estimate.

The central bank recognizes that inflation risk remain on the table.It highlighted three possible source of price pressure namely;stronger demand improvement compared to supply side expansion;unfavorable weather that could hamper food production and distribution;and administered price increase.

Yet,the central bank believe liquidity management is a more appropriate monetary tools to control inflation compared to rising interest rate,amid strong capital inflow.Rising interest rate may attract stronger stream of capital that may jeopardize Indonesia ’s trade competitiveness.

Today BI policy statement reinforce our view that the interest rate hike likely pushed back well into 2011 and the central bank may opt to introduce another liquidity measure,should inflation pressure continue to persist.Given this fact,we maintain our view that the first rate hike will be pushed back to 2Q11,with a total 50bps increase expected in 2011.

Furthermore,the central bank assesses the economy expansion remains upbeat in 3Q10,reflected in improvement in bank loan take up (21.2%yoy in Sep10),especially on investment project.Thus,the economic growth is expected to accelerate by 6.0%-6.3%and 6.0%-6.5%in 2010 and 2011 respectively.