Indonesia May Extend Interest-Rate Pause as Inflation Slows
April 10, 2011, 1:08 PM EDTBy Shamim Adam and Manish Modi
April 11 (Bloomberg) -- Indonesia’s central bank will probably extend a pause in raising interest rates after inflation slowed for a second month in March.
Bank Indonesia will keep its benchmark reference rate at 6.75 percent, according to all 18 economists surveyed by Bloomberg News. The central bank is due to release its decision in Jakarta tomorrow.
Indonesia refrained from boosting borrowing costs last month after increasing the key rate in February for the first time in more than two years, saying a strengthening currency is helping reduce price gains. That prompted economists at HSBC Holdings Plc to question the central bank’s commitment to fight inflation, and contributed to a drop in stocks amid concern a prolonged pause may prompt more aggressive tightening later.
“The central bank still prefers to wait and watch even though there are inflation risks in the pipeline,” said Vishnu Varathan, an economist in Singapore at Capital Economics (Asia) Pte. “The rupiah’s appreciation has helped reduce imported inflation but there are still domestic price pressures that need to be addressed. They have to raise rates sooner rather than later as just tightening via the exchange-rate channel will not be enough.”
The Indonesian rupiah is the biggest gainer in Asia this year, climbing about 3.9 percent, according to data compiled by Bloomberg. Consumer prices in Southeast Asia’s largest economy rose 6.65 percent last month from a year earlier, slower than the 6.84 percent pace in February.
Pressure Easing
Indonesia’s credit rating was raised by Standard & Poor’s on April 8 to the highest level since the Asian financial crisis hit the country in 1997 because of the nation’s “resilient” economy and improving finances. S&P said a diminishing of inflationary pressures is among factors that are needed before it raises Indonesia’s rating further.
The central bank said last month it isn’t concerned about inflation in March, April and May as pressure on prices eases. Governor Darmin Nasution avoided joining counterparts from Malaysia to India in tightening policy last year before unexpectedly raising rates in February by a quarter of a percentage point.
“The risk is that the easing current inflation pressures might induce Bank Indonesia to delay further policy normalization,” said Vincent Conti, a Singapore-based analyst at Australia & New Zealand Banking Group Ltd. “This tendency should be resisted.”
Core inflation accelerated to 4.45 percent in March, from 4.36 percent the previous month.
Indonesia faces some inflationary pressure in the economy beyond the impact of oil and food prices, Andrew Colquhoun, head of sovereign ratings for the Asia Pacific at Fitch Ratings, said in Jakarta on March 17.
Fuel Subsidy
Indonesia’s parliament last month approved a government proposal to delay a planned cut of subsidized fuel sales that was scheduled to begin April 1. The plan was postponed because of the threat of faster inflation amid rising oil costs, and no decision has been made on how long it will be delayed, according to Teuku Rifky Harsya, chairman of the parliamentary commission for energy affairs.
“The government’s economic stimulus by keeping fuel subsidies will keep domestic purchasing power firm although it could add to inflationary pressures in the future,” said Ari Pitoyo, head of research at PT Mandiri Sekuritas in Jakarta. This will benefit companies that rely on consumer demand, Pitoyo said.
President Susilo Bambang Yudhoyono is targeting annual growth of 6.6 percent on average through the remainder of his term ending in 2014, and companies from PT Bank Pan Indonesia to AirAsia Bhd. are counting on rising demand in the world’s fourth-most populous nation to boost their businesses.
Stock Picks
The Jakarta Composite Index has gained 1 percent this year. Pitoyo recommends stocks including Indonesia’s third-largest mobile-phone carrier PT XL Axiata and cigarette producer PT Gudang Garam, as well as tire producers PT Multistrada Arah Sarana and PT Gajah Tunggal.
Still, the stock index dropped about 8 percent in January amid concern Bank Indonesia will fall behind in combating inflation and be forced to administer more aggressive steps later.
The economy grew 6.9 percent in the final quarter of 2010, the most in six years. Deputy Governor Hartadi Sarwono said March 16 gross domestic product may have increased 6.6 percent last quarter, higher than the central bank’s February forecast of 6.4 percent.
“Indonesia’s growth fundamentals remain solid, and monetary conditions are still too loose given the strength of the recovery and the lack of spare capacity,” Conti said. “We still think that three more rate hikes of 25 basis points each by year-end are necessary to remove the existing monetary stimulus.”
--Editors: Stephanie Phang, Greg Ahlstrand
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
To contact the editor responsible for this story: Greg Ahlstrand at gahlstrand@bloomberg.net; Stephanie Phang at sphang@bloomberg.net
