Indonesia Inflation Slows, Providing Room to Hold Key Rate

By webadmin on 11:49 am Apr 01, 2011
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ovrida Manurung & Widya Utami

Indonesia’s inflation slowed for the second straight month in March as rice prices declined during the harvest period, giving the central bank room to refrain from raising interest rates.

Consumer prices in Southeast Asia’s biggest economy rose 6.65 percent last month from a year earlier, compared with a 6.84 percent gain in February, the Central Bureau of Statistics said in Jakarta today. That’s less than the 6.99 percent median forecast in a Bloomberg News survey of 22 economists.

Bank Indonesia kept its benchmark rate at 6.75 percent in March after raising it in February by a quarter of a percentage point, which was the first increase since October 2008. The central bank has allowed the rupiah to strengthen to help reduce imported inflation, Perry Warjiyo, director of economic research at the authority, said last week.

“Since Bank Indonesia targets headline inflation, the number reduces the urgency to raise rates further,” said Dariusz Kowalczyk, a Hong Kong-based senior economist at Credit Agricole CIB. “We still expect a 25 basis-point hike in the second quarter, but it is now more likely to be later rather than sooner. This is modestly negative for the rupiah.”

The rupiah was little changed at 8,700 a dollar at 10:43 a.m. in Jakarta. The benchmark stock index gained 0.7 percent.
Pressure Easing

Indonesia’s central bank, which is due to release its next monetary policy decision on April 12, said last week it isn’t concerned about inflation in March, April and May as pressure on prices ease. Prices in March may fall because of the harvest season, Governor Darmin Nasution said in Jakarta on March 21.

“The central bank may keep the interest rate at 6.75 percent if inflation slows in March,” Andry Asmoro, an economist at PT Bank CIMB Niaga, said before the inflation report. Still, inflation may accelerate in the second half of the year, Asmoro said.

Consumer prices fell 0.32 percent in March from the previous month, without adjusting for seasonal factors. That was the biggest decline in four years.

Food, including rice and chili, contributed most to the deflation in March, said Rusman Heriawan, chairman of the statistics agency. Indonesian rice cost 3.54 percent less in March compared with February, he said. The government’s move to delay the planned cut of subsidized fuel sales from April also capped price increases, he said.

‘Close Call’
Indonesian inflation may not accelerate significantly in April because it’s still the harvest period, Heriawan told reporters in Jakarta today.

Still, core inflation accelerated to 4.45 percent from 4.36 percent.

“The next policy decision on 12 April will be a close call,” Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, said in a note after the report. “We expect Bank Indonesia to deliver and probably surprise with a 25 basis-point rate hike, bringing the policy rate to 7 percent.”

Indonesia’s exports surged 28.9 percent in February from a year earlier, more than the 24.7 percent increase in January, the statistics department said. Imports climbed 26.3 percent.

Exports to Japan declined 25 percent in value to $809 million in March after the earthquake and tsunami, Heriawan said.

Signs are already emerging that the March 11 quake that has claimed 11,000 lives and triggered a nuclear crisis have taken a toll on Japan’s economy, Asia’s second biggest. A report yesterday showed Japanese manufacturing deteriorated at the fastest pace in at least nine years in March. Honda Motor Co. and Sony Corp. are among manufacturers that have halted production after the disaster.