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NEWS UPDATES Asean Affairs         2  July 2011

Indonesian inflation down

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Inflation eased in June to its lowest level in a year, adding to sentiment that the central bank will hold its key interest rate steady this month.

Consumer prices rose 5.54 percent in June from the same period a year ago, data from the Central Statistics Agency (BPS) showed on Friday. That compared to May’s annualized rise of 5.98 percent.

Core inflation, which excludes volatile food and fuel prices, was 4.63 percent year-on-year in June, little changed from May.

“After the chili spike last year, inflation has come down in year-on-year terms. The relatively strong sequential increase is not as comforting, however, especially since food prices are showing an uptick tendency yet again,” said Wellian Wiranto, an economist at HSBC in Singapore.

“[Bank Indonesia] is unlikely to be swayed by such details, however. It looks set to pause further come July 12,” he added, referring to the central bank’s policy meeting this month.

If the prediction is accurate, it would be the fifth consecutive month the rate stayed at 6.75 percent. Bank Indonesia has said it will allow a stronger rupiah to help combat imported inflation.

Eugene Leow, an economist at DBS Bank in Singapore, said that while he expected the central bank to hold rates steady this month, he still saw three more 25 basis-point hikes for the rest of the year.

Purbaya Yudhi Sadewa, chief economist at Danareksa Research Institute, said on June 26 that inflation in June would ease with help from the diminished effects of the last year’s electricity rate increase. He did not expect further interest rate hikes this year.

Bank Indonesia’s governor, Darmin Nasution, said he expected annual inflation to reach 5 percent by the end of the year, which is within the central bank’s safe range of 4 percent to 6 percent. He projected the rupiah would continue to gain for the rest of the year thanks to steady capital inflows.

The risk to that projection is the possibility of the government raising subsidized fuel costs after a plan to prohibit private cars from using the low-octane fuel was scrapped. Recent reports have shown the state budget is facing soaring pressure from energy subsidy bills after it adjusted its crude oil price assumption from $85 per barrel to $95.

“There has been talk about changes to fuel subsidy policy yet again. Facing higher subsidy bills as the global oil price stays higher than it had expected, the government is facing tough political choices now,” Wellian said.

He said the biggest impact of the government’s continued refusal to raise subsidized fuel prices “will be seen on inflation expectation readings, which have continued to remain at high levels as it is, despite the softer headline data in recent months.”

The BPS also announced Indonesia’s exports in May reached $18.33 billion, up 10.76 percent from April’s $16 billion. In January through May, exports reached $80.28 billion, a rise of 33.37 percent from the same period a year ago.

Imports were up 48.54 percent in May to $14.83 billion. From January to May, exports rose 33.86 percent to $68.51 billion. The trade surplus reached $3.5 billion in May and $11.77 billion in the first five months of this year.


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