UPDATE 4-Indonesia c.bank plays down inflation worries

By Neil Chatterjee and Adriana Nina Kusuma

JAKARTA, Feb 4 (Reuters) - Indonesia's central bank played down economists' worries over a sharp pick up in January's inflation, signalling it is in no hurry to raise interest rates, but did not repeat a previous pledge to hold rates all year.

Analysts see risks to Bank Indonesia's (BI) assessment and say that it may have to hike sharply by the third quarter to curb price pressures, which hit an eight-month high in January.

BI maintained its 2010 inflation target of 4-6 percent and said it saw food prices easing in coming months due to the main harvest, while a stronger rupiah this year was likely to help keep a lid on imported inflation. It kept its key overnight rate on hold at a record low of 6.5 percent as expected.

'A stronger rupiah will contribute positively towards (curbing) inflation,' Budi Mulya, a deputy governor, said in an interview with Reuters.

The central bank pledged last year it would keep rates at
6.5 percent throughout 2010 as long as it met its 4
6 percent inflation target. When asked, Mulya did not repeat this pledge, only saying he did not see inflation pressure in the first half of the year.

Analysts see the central bank having to play catch-up and start hiking rates by the end of June to curb a buildup in inflation driven by a stronger economy and global commodity prices.

'While we do expect a mild tone in inflation in the coming months, a look at core inflation numbers also suggests that inflationary expectations are at risk of coming undone, and this should see the rate pause cycle nearing its end,' said Joanna Tan, economist at Forecast in Singapore.

'Adding to the delicate balance of inflation-growth risks are the moves from other central banks. BI also needs to consider normalising its policy rates soon to maintain the rupiah's attractiveness in terms of yields.'

Six out of 11 analysts in a Reuters poll published earlier this week had predicted rates to start rising in the second quarter, and eight had expected them to hit at least 7.25 percent by the end of September.

Longer-dated bond yields have jumped 20 basis points from a two-year low hit mid-January but traders say the move was driven by profit-taking following China's policy tightening and not a reflection of inflation worries in Indonesia.

More liquid shorter-dated bonds indicate policy rates will be kept steady until the third quarter.

'We see no strong signal in Asia of moving towards a tight bias,' said Mulya, adding the central bank was scrutinising data and information from its peers in the region.

'Globally, there's no self-sustainability in this recovery.'

MARKETS STEADY

The rupiah was little changed at 9,315 per dollar by 1322 GMT after the rate announcement, while 10-year bond yields eased to 9.70 percent, one basis point below Wednesday's close.

January's annual inflation picked up to 3.7 percent, above market forecasts, but significantly higher than the central bank acting governor's view that it would be below 3 percent, leaving analysts sceptical the bank will be able to contain inflation.

(For a graphic on rates, CPI and money supply see http://graphics.thomsonreuters.com/0210/ID_CBR0210.gif)

'The key point is that Bank Indonesia will err on the side of caution and keep rates anchored for some time to support credit growth in the economy,' said Prakriti Sofat, economist at Barclays Capital in Singapore.

Annual growth in money supply as measured by the three-month moving average of M2 has been slowing since May last year and hit 12 percent in November.

The central bank in late January reaffirmed its pledge to boost lending by domestic banks, indicating continued loose monetary policy, but so far it has not provided details of possible new measures.

The central bank has cut rates by a total of 3 percentage points between December 2008 and August 2009.

Mulya said the central bank's inflation target had taken into account a potential hike in electricity prices, which was planned for January but has been postponed indefinitely.

(Additional reporting by Andreas Ismar, Sonya Angraini, Sunanda Creagh and Pip Freebairn; Editing by Ron Askew)
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