Indonesia raises benchmark rate on inflation concern

The Bank Indonesia, Indonesia's central bank, raised its benchmark interest rate by 25 basis points to 6 percent on Thursday to cope with expected inflation. The bank held its policy interest rate steady at a historic low of 5.75 percent since February 2012. "The policy was part of Bank Indonesia's policy mix to response preemptively to rising inflation expectations," the bank said in a statement released on Thursday. The move came after the central bank increased its Fasbi rate, the yield it pays to commercial banks on funds deposited at the bank, Tuesday night by a quarter-percentage point rise to show its readiness to take any necessary step to support the weakening rupiah. Indonesia's currency is the worst performing in Asia after the Japanese yen in the past year. It has fallen to its lowest since 2009 against the U.S. dollar. Setyoro Wahjono, an analyst at PT. Danareksa, a state owned assets management company, told Xinhua that the raise of the benchmark rate was the central bank's main effort to cool the inflation which is expected to accelerate in the coming month. "Indonesia's inflation rate will hike at a faster pace as food prices tend to pick up at the Ramadan month, during which household consumption and transport costs are regularly higher," Setyoro said. The consumer price index, Indonesia's primary gauge of inflation rose 5.47 percent in May from a year earlier, compared with 5.57 percent in April. Setyoro expected the government would increase the price of fuel at the end of this month which will push up the inflation rate as well. Indonesian Finance Minister Chatib Basri predicted inflation will quicken to 7.2 percent this year from an initial estimate of 4.9 percent should fuel prices be raised by 44 percent. Southeast Asia's largest economy has slim option other than increasing the price of subsidized fuel to reduce heavy subsidies. Failure to lower subsidies last year has led to a current-account deficit and hurt the rupiah. The Indonesian economy grew 6.02 percent in the first three months of 2013 from a year ago, after expanding 6.11 percent in the previous quarter. The government earlier lowered its GDP target for 2013 to 6.3 percent from 6.8 percent.