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September 2, 2008

Indonesia: Inflation slows but rate hike seen
Indonesian inflation inched lower in August on the back of lower oil prices, but failed to dent expectations of a rise in interest rates this week as the central bank seeks to bring inflation back into single digits, reported Reuters.

Price growth fell to 11.85 percent compared to 11.9 percent a month earlier and was just below market forecasts of 11.9 percent, reinforcing expectations that price pressures may have peaked despite strong demand ahead of major Muslim celebrations.

The statistics bureau said inflation also eased to 0.51 percent month-on-month in August from 0.6 percent in July, in line with the trend towards lower inflation across Asia but dwarfed by the drops in price growth elsewhere.

Data on Monday showed inflation in Thailand and South Korea slowed sharply in August in step with retreating oil prices, adding to evidence that their interest rates may have peaked.

But with price growth still running well above the central bank's comfort zone, Indonesian investors are bracing for a fifth rise in rates this year when the central bank meets this week. Analysts expect a further rise before the end of 2008.

"Inflation expectations are still high, so Bank Indonesia will have to raise rates whether they like it or not," said Juniman, an economist at Bank Internasional Indonesia.

"We see another rate rise this month ... because they are aiming for one-digit inflation next year."

Bank of America strategist Christy Tan said the data suggested inflation may have peaked but that markets still firmly expected a rise in borrowing costs later this week.

"A hike of 25 basis points is probably priced in and will not affect the rupiah much," Tan, based in Singapore, said.

The rupiah, which has gained around 2.5 percent this year, was largely unchanged after the data, while stocks remained in negative territory.

Bank Indonesia has raised the benchmark BI rate BIPG by a total of one percentage point so far this year to 9.0 percent. Analysts polled by Reuters in August predicted the central bank to raise the key rate to 9.5 percent by the end of the year.

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