ASEAN KEY DESTINATIONS
Indonesia inflation eases, but room for rate cut stays small
INDONESIA’S inflation rate dropped to its lowest in nearly a year in October, but most analysts say the central bank still lacks room to ease policy due to concern about the rupiah and the impact whenever United States interest rates begin to rise.
October’s annual inflation rate was 6.25 per cent, the statistics bureau said yesterday, continuing a slide since a July peak of 7.26 per cent. The October rate is the lowest since November 2014, when President Joko Widodo raised subsidised fuel prices by more than 30 per cent.
Many Indonesians hope Bank Indonesia (BI) will soon start reducing the policy rate, kept at 7.50 per cent since a 25 basis point cut in February, to boost weak economic growth.
While declining inflation is helpful, most analysts say there isn’t room for BI to cut at a November 17 policy meeting because the rupiah remains fragile ahead of a Federal Reserve decision to finally start raising US interest rates.
“We have penciled in a 25 basis points cut in December. Not this month, because BI will be eyeing employment data in the US,” Fakhrul Fulvian, an analyst at Bahana Securities in Jakarta said.
In its last policy statement on October 15, BI said it saw domestic economic pressures receding, indicating hope for room to cut the benchmark rate.
The central bank has said there is a big possibility the annual inflation rate will be near three per cent at year-end, although it has maintained its baseline scenario at 3.6 per cent.
In November 2014, the fuel-price rise sent the inflation rate to 8.36 per cent in December, and from January the subsidies were slashed.
The late-2014 developments mean beginning this month, the base for calculating annual inflation rates will be high, so the number should decline significantly.
BI’s main worry, analysts say, is still the rupiah, which has weakened more than nine per cent this year against the greenback.
There remains concern that whenever the Fed raises rates, there will be renewed pressure on the rupiah.
There is political pressure on BI to cut rates to spur annual economic growth, which in the second quarter was 4.67 per cent, the slowest pace in six years.
On Thursday, Indonesia will announce third-quarter growth data.
OCBC, in a note ahead of the release of the October 2015 inflation data, said “the magnitude of currency volatility and the lingering uncertainty over Fed fund rate hike potential will most likely keep BI’s hands tied”.
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