Thailand's Unexpected Rate Rise Puts Onus on Indonesia as Inflation Climbs

Thailand’s unexpected interest-rate increase may escalate pressure on Indonesia to follow suit after inflation accelerated in the world’s fourth-most populous nation.

Thailand brought to three the number of boosts to borrowing costs in the Southeast Asian nation this year, matching Malaysia’s moves. Indonesia, the region’s largest economy, has yet to take the step, and will probably keep its benchmark rate at 6.5 percent at a meeting tomorrow, according to all 20 economists in a Bloomberg News survey.

Indonesia’s performance on inflation will play a part in helping the country win a higher debt rating, Moody’s Investors Service said yesterday, a step that may lower credit costs and spur foreign direct investment in the nation. Thailand, whose three-year debt yields are less than half Indonesia’s, enjoys an investment-grade Moody’s rating that’s four steps higher than its neighbor’s.

“Indonesia is the only major emerging economy in Asia not to have made a move to normalize policy settings this year,” said Brian Jackson, an emerging-market strategist at Royal Bank of Canada in Hong Kong. “Officials have shown a preference to use other policy tools to manage liquidity and price pressures. This approach, however, looks increasingly untenable.”

The Bank of Thailand raised the one-day bond repurchase rate by a quarter of a percentage point to 2 percent yesterday, saying it will continue to “normalize” borrowing costs amid increasing inflationary pressures even as the timing for future moves will be dependent on the economic situation.

Still Relevant

In contrast, Bank Indonesia Deputy Governor Budi Mulya said last week the country’s benchmark rate is “still relevant” for achieving the central bank’s 2011 inflation target of 4 percent to 6 percent. The rupiah was little changed at 9,018 a dollar at 10:58 a.m. in Jakarta today.

Indonesia’s economy escaped a recession during last year’s global slowdown and its expansion has spurred capital inflows, pushed stocks to a record and lifted the rupiah to a three-year high. Moody’s yesterday placed the Southeast Asian nation’s Ba2 credit rating on review for a possible upgrade.

The Moody’s “move is well warranted,” Robert Prior- Wandesforde, Singapore-based head of India and Southeast Asia economics at Credit Suisse Group AG, said yesterday. “If the country can keep inflation well contained over the coming year, then a move to investment grade beckons.”

The Jakarta Composite Index has gained 45 percent this year, boosting stocks of companies including lender PT Bank Central Asia and noodle-maker PT Indofood Sukses Makmur. The rupiah has risen 4.1 percent against the dollar.

Inflation Quickens

President Susilo Bambang Yudhoyono is targeting annual growth of 6.6 percent on average through the remainder of his term ending in 2014. Consumer confidence rose in October from September, with a central bank index measuring expectations climbing 4.4 points to 112, the highest level since August 2009.

Indonesia’s consumer prices rose 6.33 percent last month from a year earlier, the Central Bureau of Statistics said yesterday, beating all estimates in a Bloomberg News survey of 20 economists. The gain compared with a 5.67 percent increase in October.

“Bank Indonesia will likely remain reactive rather than pre-emptive,” said Chua Hak Bin, a director of global research at Bank of America Merrill Lynch in Singapore. “Rising commodity prices, including both food and fuel, will continue to intensify inflation pressures in the coming months. Monetary tightening would likely occur through non-interest-rate measures as a first resort.”

Irish Bailout

Any rate increase would come at a time when sovereign credit woes in Europe are re-emerging with Ireland becoming the second euro country to get a bailout. Federal Reserve Chairman Ben S. Bernanke said this week the U.S. economy isn’t growing fast enough to “materially” reduce unemployment that is above 9 percent.

Thai Finance Minister Korn Chatikavanij said today the central bank’s unexpected rate increase is a concern for economic growth. Thailand’s economy grew 6.7 percent last quarter, the slowest pace this year, as exports eased and agriculture declined.

“We are concerned about the impact from the rate increase at a time when the economy has started to slow down,” Korn said, adding that the higher rate will have limited impact on the baht because the nation’s borrowing costs remain low compared with others in Asia.

Nations from Japan to the U.S. are adding monetary stimulus that could increase the risk of an influx of capital into emerging markets where interest rates are higher.

Bank Indonesia has ordered lenders to set aside larger reserves, aiming to rein in liquidity without hurting economic expansion. The central bank unveiled measures earlier this year to encourage investors to keep their money in the country longer and reduce volatility in capital flows and the currency.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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