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Home  >>   Daily News  >>   Indonesia News  >>   Economy  >>   No Indonesian rate hike expected
NEWS UPDATES Asean Affairs         27  June 2011

No Indonesian rate hike expected

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Indonesian Inflation will continue to slow in June, according to analysts, as the effect of last year’s electricity hike diminished, and that may allow the central bank to keep its key interest rate steady for the fifth straight month in July.

Purbaya Yudhi Sadewa, chief economist at Danareksa Research Institute, a unit of state-brokerage Danareksa Sekuritas, is expecting annual inflation at 5.5 percent in June, compared with 5.98 percent in May — which was a seven-month low — and 6.16 percent in April.

“There was this base effect of the electricity price hike, which will disappear from the calculation, and inflation will ease in June and in upcoming months,” Purbaya said. “That would reduce the likelihood of the central bank to hike its key interest rate this year. Because inflation is apparently under control and within the central bank’s 5-plus and minus-1 percent range.”

The Central Statistics Agency (BPS) is expected to release June inflation data on Friday.

The government raised the electricity tariff by an average 10 percent in the middle of 2010 to help recover losses, causing inflation to accelerate. The central bank kept its key interest rate, the BI rate, at 6.75 percent in this month’s monetary policy meeting. The next scheduled meeting is for July 12.

Bank Indonesia also expects core inflation — which excludes volatile foods and administered prices — to be below 5 percent by year-end, Perry Warjiyo, director for monetary policy research, said earlier this month. If that rate exceeds 5 percent, that may prompt the central bank “to take action,” it said in the January policy meeting.

Juniman, chief economist at Bank Internasional Indonesia, echoed Purbaya’s view, with a prediction of inflation falling to 5.33 percent in June.

This month, consumer prices were affected by a slight increase in food, such as rice and vegetables, as the harvest season ended, Juniman said, adding that the summer school break pushed prices up because of higher purchases of goods such as garments and increased spending on recreation. Juniman also expects the BI rate to remain unchanged until the end of the year. He forecasts the inflation rate at 5 percent to 5.5 percent this year — in line with the government’s estimate.

Chatib Basri, an economist at University of Indonesia, said June’s inflation would remain “tame” but warned that with the fasting month approaching, the figure would rise. Food prices tend to increase during Ramadan, when purchases of food increase after breaking the fast.

The central bank is likely to keep its interest rate at 6.75 percent this year thanks to manageable inflation and a strong rupiah, Chatib said. The rupiah has gained 4.3 percent against the dollar this year.

For 2011, Chatib expects inflation to rise to 6 to 7 percent — higher than the government’s estimate — as the central bank is being aggressive in boosting loan growth.

“If the banking sector’s credit growth could reach 20 percent or more, inflation may rise to above 6 percent,” he said.

 


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