Indonesia holds key interest rate as economy stabilises

JAKARTA (AFP) - Indonesia's central bank held its benchmark interest rate at 7.50 per cent on Thursday after tentative signs that Southeast Asia's biggest economy is back on track following recent turmoil.

Bank Indonesia has lifted rates by 175 basis points since June as the rupiah and stocks plunged due to foreign investors withdrawing funds on fears the United States was going to reduce its stimulus programme.

But the bank stood pat at its December meeting after data showed inflation - which surged after a fuel price hike - stabilising, the trade balance returning to surplus and the current account deficit narrowing.

The decision to hold the rate was in line with economists' expectations.

However, Credit Suisse economist Robert Prior-Wandesforde said: "We doubt that Bank Indonesia has quite finished its monetary tightening yet and now expect a 25 basis point hike to come in January."

He predicted either a sharp fall in the rupiah or negative trade figures would spur the bank to tighten monetary policy further.

As well as fears that the US Federal Reserve was poised to taper off its US$85 billion (S$106 billion) a month bond buying programme, Indonesia's situation was compounded by its own woes, particularly a large current account deficit.

But the deficit narrowed in the third quarter and the trade balance swung to a surplus of US$42.4 million in October from a large deficit the previous month.

Inflation edged up to 8.37 per cent in November, accelerating at a slower rate than expected.

Indonesia has enjoyed a prolonged boom in recent years, clocking up annual growth of more than 6 per cent but analysts predict the economy will grow at its slowest pace in four years in 2013.