Mansek BI rate stays at 6.5%, but rate hike is drawing closer

Bank Indonesia (BI) kept the benchmark rate at 6.5% in governor board meeting today, in line with our and consensus expectation. However, BI reiterated theirconcerns over rising inflationary pressures that may boost inflation beyond its 4%-6% target. Despite keeping the rate flat, Bank Indonesia indicated that they will introduce tighter liquidity measure related to banks’ reserve requirement inthe near term. We believe this could be a signal of tighter monetary policy. Thus,at this juncture, we maintain our view that interest rate likely will start to increase in 4Q10 by total 50bps to 7% by the end of 2010 and another 50bps in 2011, given estimated inflation forecast of 5.9% yoy and 6.6% yoy in YE10 andYE11 respectively.