UPDATE 2-Indonesia fin min sees lower interest rates in 2010

NUSA DUA, Indonesia, June 13 - Indonesian Finance Minister Sri Mulyani Indrawati said on Saturday she expected interest rates in Southeast Asia's biggest economy to continue falling next year amid benign inflation.

The domestic bond market has rallied in recent months on expectations of monetary easing but analysts had warned the scope for further reductions in the benchmark interest rate <BIPG> may be limited following a rebound in prices of oil and some commodities.

The central bank has cut its key interest rate by a total of 2.5 percentage points since December to 7.0 percent, and has said it may cut further in response to easing inflation and a firm rupiah <IDR=>.

"We target inflation to be at 5 percent plus/minus 1 (percentage point), the interest rate to continue to fall and the rupiah to remain steady," Indrawati said in a prepared speech for an economic seminar in Bali organised by the central bank.

She was referring to the inflation and interest rate outlook for 2010.

The central bank's acting governor Miranda Goeltom said any decision on interest rates is also based on the central bank's long-term objectives. She did not elaborate but Bank Indonesia is tasked with lowering inflation while maintaining stability in the rupiah.

"We have to be very cautious, (we) have to see it long-term," Goeltom told reporters when asked about the possibility of lowering interest rates further.

The year-end inflation forecast was in line with an inflation forecast of 4-6 percent for 2010 agreed between the ministry and a parliamentary working committee earlier this month.

Inflation eased to 6.04 percent in May from 7.31 percent in the previous month, thanks to lower food price pressure following a good rice harvest. Rice, a staple food, accounts for a significant weighting in the consumer price index.

The International Monetary Fund said earlier in June it expected Indonesia's inflation would decline to about 5 percent by the end of the year.