UPDATE 2-Indonesia cbank: inflation lower than market thinks

By Adriana Nina Kusuma

JAKARTA, Jan 29 (Reuters) - The acting governor of Bank Indonesia said on Friday he expected January inflation to be less than 3 percent, much lower than market forecasts and underlining the view that the central bank will keep rates on hold next week.

A Reuters poll on Friday showed a median forecast of 3.6 percent for the rise in the consumer price index in January from a year earlier. It rose 2.8 percent in December's data.

But the acting governor, Darmin Nasution, said the data due on Monday would show the index rose less than 3 percent from a year earlier.

'Year-on-year will still be below 3 percent' he said, when asked by reporters about January inflation. He didn't elaborate.

There was no immediate impact on bond prices. The 10-year bond yield was unchanged at 9.8 percent from the previous close, dealers said.

Bank Indonesia is due to review policy next Thursday and is widely expected to leave its policy rate on hold at a record low of 6.5 percent.

At its last meeting early in January, the central bank said it did not expect inflation to pick up in the first half of 2010.

The comments prompted analysts to scale back their expectations for a second-quarter rate rise.

Indeed, Nasution had floated the idea late last year that the central bank could leave rates unchanged all year if inflation stayed within target.

Higher food prices were expected to have put pressure on inflation in January, partly because of distribution problems in some parts of the country.

Inflation appears to be picking up after falling steadily during 2009. It hit a nine-year low in November of 2.4 percent.

A much lower-than-expected inflation figure for January may help convince more market players that the central bank will keep its key overnight rate at a record low of 6.5 percent this year.

On a monthly basis, inflation is seen at 0.5-0.6 percent, Nasution told reporters.

Nasution also said that recent weakness in rupiah currency was temporary.

'As usual, after one or two weeks it (rupiah) will recover,' he said.

(Additional reporting by Saikat Chatterjee in Hong Kong; Writing by Aloysius Bhui; Editing by Sara Webb)

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