Bank Indonesia (BI) left its policy rate at 6.5% today, as expected, and kept its neutral bias. The economic upswing should continue while annual inflation will probably stay below the 6% ceiling. We now expect a first rate hike in April or May but still see the BI policy rate climbing to 8% by end 2010. This is a more aggressive tightening than the markets currently anticipate. Therefore, we forecast that government bond yields will rise. The rupiah should eventually resume its appreciation trend as well.
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