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NEWS UPDATES Asean Affairs        19 January 2011

Deutsche Bank warns of Indo inflation

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Lingering inflation will remain Indonesia's biggest threat this year as economic growth accelerates, Deutsche Bank said.

"Indonesia saw a stellar financial year in 2010, and it will be difficult to follow that, especially with inflation pressure." Having said that, Indonesia's outlook is still very positive," Taimur Baig, director and senior economist at Deutsche Bank, said in a global economic outlook.

Food prices have risen sharply since December, and economists have warned that inflation may accelerate further this year.

Last week, the International Monetary Fund and World Bank also said inflation and capital flight were serious threats to Indonesia's economy.

Taimur said Bank Indonesia should take action as inflation would rise to more than 7 percent this year, more than double the rate in 2009, because of rising food prices.

"I expect inflation to move toward 7.8 percent by April. BI should take action as soon as possible, but they are likely to wait until the second quarter," he said, suggesting the central bank lift its benchmark interest rate by 100 basis points to 7.5 percent.

Market players and economists have been pushing for an increase in the benchmark rate in order to contain inflation.

Bank Indonesia had kept the rate at a record-low 6.5 percent since August 2009, but last week indicated it was ready for a hike.

Indonesia's economy is forecast to expand by 6.4 percent this year from an estimated of 6 percent in 2010, according to the central bank.

"Indonesia has huge internal economic demand. That makes Indonesia an independent economy of its own," Taimur said.

Separately, Deutsche Bank's global economic research found economic growth and inflation rising side by side in Asia, indications of recovery emerging in America and debt still looming over Europe.

With Indonesia's lack of reliance on exports, there is little exposure toward the uncertainty in Europe and America, research found. Of 15 countries in the Asia-Pacific region, Indonesia has the least sensitivity toward Western economies, the bank said.

Countries such as Singapore, Hong Kong and Taiwan, which are far more dependant on trade, have the highest sensitivity toward the West.

Another drawing card for Indonesia is its exports of commodities such as oil, natural gas, coal and palm oil.

As commodity prices rise, Taimur said, the nation should be able to take advantage.

Moody's Investors Service raised Indonesia's rating on Monday, citing the its resilience against financial volatility.

The foreign- and local-currency debt rating was lifted from Ba2 to Ba1, one notch below investment grade.

Taimur said 2011 will be more complicated for Indonesia, but he believes foreign investors have genuine interest in its market.

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