Indonesia’s central bank raised its key interest rate by 25 basis points yesterday following a spike in inflation caused by a government increase in the price of fuel.
Bank Indonesia’s third rate rise in three months took the benchmark rate to 8.75 percent and came as surging prices across Asia force the region to contemplate unpopular increases in borrowing costs.
“Bank Indonesia will continue to implement flexible, cautious and measured policies to tame inflation,” its governor Boediono said following the central bank’s policy meeting.
He said inflation could range between 11.5 percent and 12.5 percent by year’s end, before easing off to between 6.5 percent and 7.5 percent by the end of next year.
A 28.7 percent average jump in fuel prices in May and surging costs for food staples pushed year-on-year Indonesian inflation to 11.03 percent last year, official figures showed on Tuesday.
The year-on-year number was lower than forecasts of more than 12.5 percent because of a re-weighting of the figures to cut the impact of food prices. But the monthly rise from May was still the fastest in almost two years.
The stock market had factored in the rates rise and barely reacted to the bank’s move, but analysts expect that borrowing costs could rise as high as 9.5 percent by September.
The central bank’s move comes as Asia struggles to curb inflation amid record-high world crude oil prices and soaring food costs.
India recently moved to cool credit growth, raising its key short-term lending rate by half a percentage point after inflation hit a 13-year high of more than 11 percent.
Predictions that inflation figures to be released in the Philippines today could reach double figures have also raised expectations of a rate rise there.
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