Central Bank Raises Interest Rates on Inflation Fears

JAKARTA ~ The central bank raised its key interest rate by 25 basis points on Thursday following a spike in inflation caused by a government hike 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 hikes in borrowing costs.

“Bank Indonesia will continue to implement flexible, cautious and measured policies to tame inflation,” its governor Boediono told Dow Jones Newswires after the central bank’s policy meeting.

He said inflation could range between 11.5 and 12.5 percent by year’s end, before easing off to between 6.5 and 7.5 percent by the end of 2009.

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 in June, official figures showed Tuesday.

The year-on-year number was lower than forecasts of more than 12.5 percent due to 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.

High food and fuel prices have sparked widespread protests and trimmed growth forecasts in Southeast Asia’s largest economy.

The increased cost of borrowing is likely to hit growth and company earnings even further, piling more pressure on President Susilo Bambang Yudhoyono ahead of elections next year.

Yudhoyono’s poll ratings have taken a beating, with one survey released Sunday showing his main election rival, former president Megawati Sukarnoputri, shooting ahead in recent months.

The central bank’s move comes as Asia struggles to curb inflation amid record-high world crude oil prices and soaring food costs.

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