IMF asks Indonesian central bank to stop rates decrease

JAKARTA-
The International Monetary Fund (IMF) suggested the Indonesian central bank, Bank Indonesia (BI), to leave the regime of interest rates decrease policy starting from the second semester this year following the expectation of increasing commodity prices and improving demand in line with the recovery of the world's economy.

Milan Zavadjil, the agency's Chief Representative for Indonesia, said that the central bank's approach should be careful ahead of the end of the year. He said that further interest rates cuts were irrelevant anymore with the current condition.

He argued that the big monetary stimulus channeled to the banking system would eventually show its impact. In the same time, high level liquidity should be handled with proper policies.

"We believe that the BI has a limited room to further cut rate seven though inflation pressure has been receding lately and we see rupiah appreciation," he told the daily on Monday.

In the World Economic Outlook (WEO) Update released by the agency last week, countries were considered starting to get out of the worst economic crisis since the World War II. However, the process to recovery was predicted to go slow.

In the report, improving commodity prices and demand in line with economic recovery in advanced nations lately were predicted to provide pressure to the world's inflation next year.

Generally, developing countries were suggested to lower their interest rates if their have low rates of inflation. However, there should be some careful considerations to avoid disruption in foreign exchange rates and capital outflow.

According to Zavadjil, further decreasing interest rates were not suitable for Indonesia anymore. "The Indonesian economy is starting to grow rapidly. Besides, there are challenges from increasing commodity prices that could contribute to acceleration on inflation speed," he said.

Since December 2008 to July 2009, the BI had been reducing interest rates by 275 basis points to 6.75 percent currently as a response of decreasing inflation speed. In July 2009, year-on-year inflation was recorded at 3.65 percent.