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Indonesia Increases Interest Rates to Curb Jump in Inflation

Indonesia's central bank has raised interest rates sharply in an effort to curb soaring inflation. And the World Bank says growth in East Asia will slow only modestly this year and next.

Indonesia's central bank has raised interest rates at its most aggressive pace since the Asian financial crisis of the late 1990's. The benchmark Bank Indonesia rate was increased by 1.25 percentage points to 12.25 percent, in response to a sharp increase in inflation.

Indonesia's inflation rate jumped to nearly 18 percent in October, the highest in four years. The jump was caused mainly by the government's decision to cut fuel subsidies last month, which caused the cost of many goods and services to rise.

Analysts such as Adrian Mowan, a regional strategist with JP Morgan Chase in Hong Kong, believe that the rise in inflation and the interest rate increase will have a negative impact on Indonesia's economy.

"Inflation has moved higher, so purchasing power for Indonesian consumers is diminished…. So now there will be pressure on the central bank to try to slow down growth in order to manage the inflationary concerns," he said. "So potentially, interest rates may need to go higher…. Generally, the outlook is looking considerably less favorable than it was, say, six to eight weeks ago."

In its twice-yearly review of the region, the World Bank said growth in East Asia will slow only modestly this year and next, as domestic demand appears strong enough to cope with higher energy prices.

The Washington-based institution projects that gross domestic product in the emerging economies of East Asia will grow by 6.2 percent in 2005 and 2006 - less than the 7.2 percent increase in 2004, but still strong.

China's Ministry of Railways says it needs at least $240 billion to upgrade its rail system to meet the demands of the country's rapid economic growth. To raise the cash, China plans to list parts of its state-run railways publicly within the next two years.

The ministry said foreign investors would be allowed to buy minority positions in the national railways, and majority or even full ownership of local lines.