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Indonesia and inflation

 
AseanAffairs     2 February 2011

Indonesia, Asean’s largest economy that accounts for 40 percent of the total Asean economy, is taking a cautious approach to handling the current wave of inflation in Asean.

Most economists are expecting the interest rate or reference rate , as it is called, will remain at 6.5 percent when financial policy makers on Friday. That’s a record low for the country. Bank Indonesia Governor Darmin Nasution said last month that interest rates would be raised at the “appropriate” time. Inflation was at 4.18 percent in January, down from 4.28 percent in December. The key figure in Malaysia is 5 percent inflation. If inflation hits that point, it is expected interest rates will go up.

Bank Indonesia also plans to reintroduce a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows.

Analysts say that the current inflation in Indonesia is driven by food prices. In that vein, Indonesia has just made substantial purchases of rice from Thailand to shore up its staple food supply, before its own crop is harvested.

Asian central banks may need to raise interest rates further to limit the risk of overheating in their economies and prevent a “hard landing,” International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday. The Philippines and Indonesia are the only two major Southeast Asian economies using interest rates as a policy tool that didn’t raise rates last year.

Most observers expect that April is a more likely time for the Indonesian rate to be increased rather than now.

By

Paul A. Ebeling, Jnr