Indonesia on track to lift rates around mid-year

Bank Indonesia (BI) left rates at 6.5% today, as expected. The economic upswing will almost certainly stay strong but bank credit growth is still weaker than the authorities would like and annual inflation should stay comfortably below the 6% target ceiling until the second half of 2010. Nevertheless, BI needs to be forward-looking. We expect a first policy rate hike in June and see rates rising to 7.50% by end-2010. Government bond yields are likely to climb later this year all along the curve.