INSTANT VIEW 4-Indonesia holds rates, inflation seen down

Published: 03 Nov 2009 22:08:49 PST

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. KEY POINTS:

- Central bank keeps rates on hold at record low of 6.5 pct

* C.bank maintains inflation forecasts for 2009 and 2010

* C.bank forecasts Q4 annual GDP growth to be better than Q3

* C.bank says strong commitment to bring down price pressure

COMMENTARY:

DAVID COHEN, ECONOMIST, ACTION ECONOMICS, SINGAPORE

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."

"They won't let inflation get out of hand. Even when they don't tighten they seem obliged to reassure they are still committed to containing inflation."

"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, DANAREKSA SEKURITAS, JAKARTA

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."

"Yields are likely to remain stable throughout the rest of the year as the market has priced in the key rate at 6.5 percent until year-end."

HELMI ARMAN, BOND STRATEGIST AND ECONOMIST, BANK DANAMON, JAKARTA

"I think the bond market has already priced in" the central bank decision to keep rates on hold.

Compared to the Philippines, "in terms of carry (trade), we are still more attractive. (Our) yields are higher. There is also this prospect of a ratings upgrade" for Indonesia.

KENNETH AKINTEWE, BOND FUND MANAGER, ABERDEEN INVESTMENT MANAGEMENT, SINGAPORE

"There are no surprises on that front. Indonesia is different from other countries because even in the worst of the downturn Indonesia is more resilient than some of their counterparts across the region. But with inflationary pressures resurfacing, Indonesia would do well to pay heed to that than fall behind the curve.

"Like some other countries across the region like India, they should start tightening excess cash in the banking system and we expect the first rate hikes only in the back end of the first quarter of 2010."

- AGUS SALIM, HEAD OF DEBT CAPITAL MARKETS, TRIMEGAH SECURITIES, JAKARTA

"We expect rates to be raised in the first half after the government's policies (on administered prices) are much clearer.

"Compared with the bond market in the Philippines, our bonds offer relatively higher yields, with better liquidity. They should continue to lure foreign investors."

MARKET REACTION:

- The rupiah <IDR=> was at 9,550 per dollar after the announcement, rebounding from an intraday low of 9,610.

- The Indonesia Composite Index <.JKSE> was up 0.7 percent in the morning before the market closed for the midday break.

- Yields of 5-year benchmark government bonds were quoted at 9.33 percent at 0520 GMT after the rate announcement, against 9.38 percent before the announcement, a trader said.

BACKGROUND:

- All 13 analysts polled by Reuters had forecast the central bank to keep its policy rate on hold at 6.50 percent until the end of the year. Seven analysts expected the central bank to raise rates in the first quarter and all but one saw rates going up by mid-2010. [ID:nJAK495151]

- The central bank ended its monetary easing cycle in September, having cut rates by a total of 300 basis points since December.

- Indonesia's annual inflation eased more than expected in October to 2.57 percent, from 2.83 percent in September. [ID:nJKB003241]

LINKS:

- BI rate details......<BIPG>

- Central bank website ........ www.bi.go.id