UPDATE 1-Indonesia holds rates steady, vows to curb inflation

JAKARTA, Nov 4 - Indonesia's central bank kept its benchmark overnight rate <BIGP> at a record low of 6.50 percent on Wednesday and said it expected inflation to come down towards levels enjoyed by its neighbours over the medium term.

Analysts, however, said the central bank may start to hike rates again in the first quarter in a bid to curb price pressure.

Benchmark five-year government bond yields were quoted by dealers down 5 basis points at 9.33 percent after the rate announcement, while the rupiah <IDR=> rebounded from an intraday low. Stocks <.JKSE> were up 0.7 percent in the morning before the midday break.

The central bank statement on inflation showed that "the central bank doesn't want to tighten prematurely but they want to maintain the market confidence," said David Cohen, of Action Economics in Singapore.

"The inflation building up might prompt them to tighten interest rates but I think the market was relieved by the report this week for October showing inflation was still contained."

Budi Susanto, bond analyst at Danareksa Sekuritas, said the central bank's comments on inflation "means that BI expects inflation to remain benign so there's no urgency for the central bank to hike its rates until year-end."

All 13 analysts in a Reuters poll on Monday predicted the central bank would hold its policy rate at 6.50 percent this week and until the end of the year given that inflation remains subdued for now.

Figures this week showed annual inflation in October was a lower-than-expected 2.57 percent, the lowest level since June 2000, when it was 2.04 percent based on statistics bureau data. [ID:nJKB003241]

All but one analyst predicted that the central bank will raise rates in the first half of next year to pre-empt any spike in inflation amid expectations that the government would raise electricity and energy prices next year. A slight majority opted for at least a quarter point rise in the first quarter. [ID:nJAK123091]

BI has cut the rate by a total of 300 basis points to 6.50 percent since the start of its monetary easing cycle in December. It cut rates to that level in August, the ninth reduction to combat the global economic downturn since late in 2008. [ID:nJAK495151]