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Indonesia’s inflation eases, but rates seen unchanged


November 4, 2008

Indonesia’s inflation eases, but rates seen unchanged

Indonesia's inflation eased in October from a two-year high, although the central bank is expected to avoid a global trend of cutting interest rates and keep its rates steady this week to support its currency, reported Reuters.

The reduction, as pressure from food and fuel prices came off, would boost market confidence in the outlook for Southeast Asia's biggest economy after a sharp fall in the rupiah and the Jakarta stock market in October as investors sold emerging markets assets, analysts said.

But the central bank is likely to prefer keeping its overnight policy rate BIPG on hold on Thursday at 9.5 percent, so that the rupiah can maintain a healthy 8.5 percentage-point premium over the US fed funds rate.

"We expect BI to keep rates on hold," said economist Juniman of Bank Internasional Indonesia.

Investors "are asking for a wider spread for investing in emerging markets. There is a risk of capital outflows if the rate is lowered," he said.

The consumer price index (CPI) in October rose 11.77 percent from a year earlier, the national statistics bureau said on Monday.

That was slightly below an 11.8 percent increase forecast by analysts in a Reuters poll and below September's annual rise of 12.14 percent, a two-year high.

The data showed that prices rose 0.45 percent from September, easing sharply from a rise of 0.97 percent in the previous month. The monthly figures are not seasonally adjusted.

The Indonesia Composite Index .JKSE closed up 7.6 percent, in line with gains in other regional markets.

The rupiah and the stock market have largely stabilised in recent days, but the currency has still lost 13 percent against the dollar so far this year.

The rupiah dropped close to 13 percent against the dollar in October, Reuters data shows, and the stock index fell 31 percent. Reflecting market jitters, the rupiah slumped as much as 9 percent last Tuesday while the stock market sank close to a three-year low.

Most analysts expected Indonesia's inflation to remain high at the end of the year, in line with the central bank's forecast of 11.5-12.5 percent.

"Falling crude oil prices should translate into milder inflationary pressures going forward, but still-elevated global prices are likely to give adequate support for a double-digit inflation trend in Indonesia," said Enrico Tanuwidjaja, Singapore-based economist at OCBC Bank.

The central bank has raised its key interest rate six times this year, from 8.00 percent to 9.5 percent, to try to curb inflationary pressures due to high food and energy prices. Price pressure from food, however, eased in October due in part to lower global commodity prices. Lower fuel prices in global markets have also allowed the government to reduce unsubsidised fuel prices for domestic industries.

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