Indonesia may raise interest rates in 2010 after one final cut this year

Indonesia's improving economic outlook has pushed it out of the world's 10 riskiest issuers of sovereign bonds, according to credit-default swap prices from Credit Market Analysis.

Monetary policy will be directed toward “maintaining macroeconomic and financial system stability,” Bank Indonesia said in yesterday's statement. “With this consideration, monetary policy will be done more carefully considering that the room for monetary easing is getting limited.”

Indonesia has been less affected than its neighbors by the worst global recession since the Great Depression as it isn't as reliant on exports. The US$433 billion economy expanded 4.4 percent in the three months to March 31 from a year earlier, the fastest pace in Southeast Asia.

The US$433 billion Indonesian economy is forecast to expand 4.6 percent in the second half from an estimated 4.1 percent in the first six months of 2009, Finance Minister Sri Mulyani Indrawati said June 30. The economy may expand 4.3 percent this year, helped by domestic consumption, Sri Mulyani said.

India, South Korea

Indonesia isn't the only economy in Asia where policy makers might soon begin to raise borrowing costs amid signs that higher commodity prices could prompt a flare up in inflation.

The Reserve Bank of India may start increasing interest rates from record lows in early 2010 as inflation accelerates at more than double the expected pace, Goldman Sachs economist Tushar Poddar said in a June 10 report. Barclays Plc says the central bank may raise borrowing costs as early as next quarter.

South Korea's economic downturn “does not look so severe now” and the nation's central bank may raise interest rates by at least 25 basis points by the end of the year, Credit Suisse Group AG said in a June 18 report.

The US$970 billion South Korean economy will probably shrink 1.5 percent this year, less than an April forecast of a 2 percent contraction, the Ministry of Strategy and Finance said June 25. Growth of 4 percent is expected in 2010, it said.

Other central banks in the region have stopped lowering borrowing costs, judging that earlier interest-rate cuts and stimulus plans worth as much as US$950 billion are beginning to revive Asia's economies.

Bank Negara Malaysia on May 26 refrained from cutting interest rates for a second straight meeting, betting the economy will improve after contracting in the first quarter for the first time since 2001.

Thailand's central bank kept interest rates on hold on May 20 to assess the effect of its most aggressive series of cuts ever on an economy facing its first recession in a decade.

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