Fri, 11 Jun 2010
From: Reuters
By Neil Chatterjee & Gde Anugrah Arka
The International Monetary Fund on Thursday forecast Indonesia’s economic growth will accelerate this year amid improving investment and said the central bank may need to adjust its monetary policy if price pressures rise.

The Fund also said after meetings in Jakarta with Indonesia’s central bank and other officials that recent capital outflows from Indonesia were likely to be temporary and it saw small downside risk from the euro zone debt woes.

“We see growth accelerating to 6 percent and we think inflation will be contained at under 5 percent,” Thomas Rumbaugh, the IMF’s division chief for Asia and Pacific, told reporters.

Southeast Asia’s biggest economy expanded 4.5 percent in 2009, among the few countries in Asia to have posted growth during a period of global recession, thanks to resilient domestic demand.

Drawn by its strong growth prospects, investors have poured into Indonesia’s bonds, stocks and its currency, the rupiah, in the past year, when its markets saw stellar gains. The stock market is up nearly 10 percent so far this year, one of the best performers in Asia.

Rumbaugh said demand and commodity price pressures could start to rise and lead to slightly higher inflation in the future, requiring a policy response from the central bank, Bank Indonesia.

“We don’t see the need for it yet ... later in 2010 they may need to prepare to adjust monetary policy if inflationary pressures increase,” Rumbaugh said.

Indonesia’s annual inflation in May accelerated to 4.16 percent, its highest level in a year, as food prices picked up, and was in line with expectations.

A Reuters poll in April predicted Indonesia’s economy to expand 5.8 percent this year and 6.1 percent next year. The poll also forecast Indonesia’s year-end inflation at 4.9 percent this year and 6.0 percent next year.

Since late 2009, central bank officials have stressed that they saw no reason to raise interest rates as they expected inflation to be within their 4-6 percent target range in 2010.

Analysts, however, expect rate hikes by the third quarter this year and see Bank Indonesia as potentially behind the curve.

Deputy governor Hartadi Sarwono said on Wednesday that the central bank may need to raise interest rates to 7 percent next year after keeping them on hold at a record low of 6.5 percent this year.

The comments were the first by the central bank on the timing and scale of any rate rises that will likely be aimed at curbing inflation, and come after the country’s finance minister said last month rates could stay at 6.5 percent through 2011.

Indonesia’s bond yield curve has steepened in the past two weeks as a result of lower yields on the short end of the curve, which analysts said suggested increased market expectations of a near-term benign rate outlook.



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