Bank Indonesia may raise key rate again to stem soaring inflation

Bank Indonesia may raise key rate again to stem soaring inflation

Bloomberg, Jakarta/Singapore

Indonesia's central bank may raise its benchmark interest rate by
a percentage point, its sixth increase in four months, after a
report showed inflation jumped to a six-year high in November for
the second month.

Bank Indonesia may raise the BI rate, a reference for bill
sales, to 13.25 percent from 12.25 percent, according to the
median forecast of 10 economists in a Bloomberg survey. The
central bank's board of governors will meet in Jakarta on Dec. 6.

Inflation in Southeast Asia's largest economy accelerated a
more-than-expected 18.4 percent from a year earlier in November,
the fastest pace since June 1999. Central banks in India, South
Korea, Thailand and Malaysia have increased interest rates this
year to curb inflation caused by rising fuel prices.

November's inflation surge "supports our view that there will
be more monetary policy tightening in Indonesia," Christa Janjic,
senior economist at UBS AG said in a note to clients. "We and the
market had expected inflation to have peaked in October. What
went wrong," was that food prices did not fall after the Muslim
festival and second-round inflationary impact was stronger than
expected.

BI on Nov. 1 raised its benchmark interest rate by a record
1.25 percentage points to 12.25 percent, the fifth increase in
nine weeks, after October's inflation report showed the consumer
price index had gained 17.9 percent.

"It is impossible for Bank Indonesia to loosen its stance,"
central bank spokesman Halim Alamsyah said in Bali on Friday. "We
will keep the tight monetary policies in place."

Prices have risen after Indonesia almost tripled kerosene
costs and more than doubled diesel tariffs on Oct. 1. Gasoline
prices rose by 88 percent. The move will help the government cap
subsidies this year at Rp 89.2 trillion (US$8.7 billion).

The surge in inflation in November "was affected by oil shock
and fuel price increases," Bank Indonesia's Senior Deputy
Governor Miranda Goeltom said in Bali on Friday. "Our response
will be to consider the core inflation more. Core inflation in
October was higher than what we expected in the beginning of the
year."

Indonesia's real interest rate, the difference between its
interest rate and inflation, stands at a negative 6.15 percentage
points, compared with negative 2.15 percentage points in Thailand
and half a percentage point in the Philippines.

"The big question for Bank Indonesia is, how long will it keep
the negative interest rate and how big will it keep the gap?,"
said Winang Budoyo, an economist at PT Mandiri Sekuritas in
Jakarta. "Even if Bank Indonesia raises rates, it won't be as
high as last month's 125 basis point increase."

BI on Nov. 30 said inflation will probably exceed 17 percent
this year.

"Ideally, the BI rate should be 14 percent or 15 percent,"
Drajad Wibowo, an economist and a member of the House of
Representatives' Commission XI on financial affairs, said on
Friday in Bali. "Banks have already increased their deposit rates
in response to high inflation. If BI doesn't increase rates, it
is not consistent and banks won't trust the central bank. They
have to maintain credibility."

Indonesia's economic growth rate slowed to 5.3 percent in the
third quarter from a year ago, the slowest this year, after
gaining 5.8 percent in the previous quarter and 6.1 percent in
the first three months of the year.

The central bank forecasts next year's growth rate will be
between 5 percent and 5.6 percent, Central Bank Governor
Burhanuddin Abdullah said on Nov. 30.

Accelerating inflation also forced Indonesia's real estate
association to cut its forecast for new home sales this year by
as much as 20 percent because higher fuel costs slowed demand for
houses.

The Indonesian Real Estate Developers Association reduced its
forecast to as low as 80,000 homes from the previous estimate of
100,000, said Lukman Purnomosidi, chairman of the association.