IMF:Indonesia cbank may need to hike rates in 2010

* IMF: Bank Indonesia needs to anchor inflation expectations

* IMF: BI policy appropriate for now, may need to hike in H2

* IMF: BI move to lift banks' LDR may conflict with risk mgmt

* IMF lifts 2011 GDP forecast to 6.2 pct, urges govt spending

The International Monetary Fund (IMF) said on Friday Indonesia's central bank may have to start unwinding accommodative monetary policy in 2010 to avoid risking accelerating inflation next year and to enhance credibility.

Indonesia's annual inflation picked up in August to the highest since April 2009 and analysts expect Bank Indonesia to start lifting rates by the end of the year, although the central bank has repeatedly said it will leave rates on hold all year if inflation meets its end-year target of 4-6 percent.

The IMF saw end-2010 inflation for Southeast Asia's biggest economy at 5.9 percent. The report said Bank Indonesia's current stance is justified, since inflation is within the target range and given the risk that hiking rates now could attract even more volatile portfolio capital.

But looking ahead, it said various risk factors could push inflation expectations higher in 2011, and so Bank Indonesia (BI) needed to signal a proactive stance to anchor inflation expectations within the target range.

"We believe there needs to be a stronger commitment to reducing inflation and keeping it low," Thomas Rumbaugh, the IMF's division chief for Asia and Pacific, told reporters.

BI left its policy interest rate BIPG at a record low 6.5 percent this month as expected, as it seeks to spur loan growth, but raised bank reserve requirements -- cash that has to be put aside with the central bank -- in an effort to curb inflationary pressures.

The IMF warned the move could conflict with banks' own credit risk management measures, and said it saw credit growth gaining momentum in any case with the economic recovery.

The IMF kept its economic growth forecast for the G20 member at 6 percent for 2010, and lifted its forecast for 2011 from 6 percent to 6.2 percent. 

Indonesia saw the third-fastest growth among G20 members last year as its economy proved resilient to the credit crisis. Investors have poured money into Indonesian assets in the past 18 months on hopes for further rating upgrades, but the IMF said near-term risks would rise if there was a sustained increase in global risk aversion that could lead to capital outflows.

Foreign investors sold a net 1 trillion rupiah ($111 million) of bonds in the first half of September, latest data shows, trimming their holdings to 27 percent of all outstanding debt, on concerns a record bond market rally may be coming to an end.

Indonesian bonds have delivered 20 percent returns so far this year, versus a 12 percent rise in the broader Asian index, according to Thomson Reuters data. 

The IMF recommended the gradual conversion of nonmarketable government bonds in BI's balance sheet to marketable bonds, to expand its policy toolkit for liquidity management. It said Indonesian authorities agreed and were discussing this.

The IMF also urged the government to reduce energy subsidies and improve tax collection, and to better execute government budget spending, particularly on infrastructure, to drive growth.

Inadequate roads, ports and power supplies are a major obstacle to foreign direct investment, which the government is hoping to lift to provide more stable longer-term financing.Source: Reuters