REPUBLIKA.CO.ID, JAKARTA - Bank Indonesia increases its benchmark interest rate by 50 basis points, from 6,50 to seven percent on Thursday. Executive Director of Department of Communication in BI, Difi A Johansyah said it was based on current condition associated with weakening IDR.

"This is a response to control inflation and possibility of imported inflation due to the weakening IDR against USD," Johansyah said on Thursday.

BI predicted that inflation by the end of the year would range from nine to 9.8 percent. High inflation is mainly derived from volatile food and administered prices, while core inflation is still relatively under control.

BI rate hike is expected to mitigate possible risk of IDR depreciation. On Thursday, IDR was closed at 10.936 per USD. Uncertainty of IDR is still relatively high reflected in high volatility and wide range of trade, particularly because reaction of investors who were too excessive or overshooting.

International Monetary Fund (IMF) advised Indonesian government not to impose all measures to overcome current economic situation to monetary policy. Advisor of IMF to Asia and Pacific Department David Cowen said monetary policy should be focused to address current account deficit.

"With the right policies, Indonesia will be able to prepare themselves to fight external shocks that could potentially arrive in future," Cowen said.

Cowen said in structural economy, Indonesia must focus on fiscal reform, labor market flexibility, financial sector and improvements of business climate. 

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