Indonesia holds key rate at 6.50% as growth slows

Indonesia's central bank held its benchmark interest rate at 6.50 percent Thursday after two successive hikes, as it shifted focus from reining in high inflation to halting an economic slowdown. At its past two meetings, Bank Indonesia lifted interest rates by 75 basis points to tame inflation -- which hit a four-year high after a huge fuel hike -- and to support the rupiah, which has plunged against the dollar. But the bank stood pat on Thursday, insisting that inflationary pressures had eased. Spokesman Peter Jacobs told reporters the bank was confident inflation would return to its target range of between 3.5 and 5.5 percent by 2014. "The central bank will continue to monitor and try to keep inflation down, while stabilising both the rupiah's value and our financial system," he said. Prices soared in July by 8.61 percent on-year following the fuel price hike and during the Muslim holy month of Ramadan, when prices typically go up as people buy expensive foods for fast-breaking feasts. The rupiah has fallen to a four-year low against the dollar after investors pulled their money out of Indonesia amid fears the United States may reduce its huge stimulus programme. Growth is also slowing however. In the second quarter it slipped to 5.8 percent, the slowest since the third quarter of 2010, on easing Chinese demand for commodities. London-based Capital Economics said in a note more hikes could be expected in the near future as short-term inflation remained a concern. However, it said future rises were "likely to be gradual", noting that "the central bank also has to consider that the economy is weakening".