Indonesia Says 2011 Core Inflation May Not Exceed 5%
Indonesia’s core inflation may not exceed 5 percent this year even as costlier commodities threaten to push consumer-price gains above 6 percent, the central bank said, signaling it will keep interest rates at a record low.
Bank Indonesia will work closely with the government to contain domestic prices and inflation expectations, Perry Warjiyo, director of economic research at the central bank, told reporters in Jakarta. The rupiah’s appreciation will help contain price gains at about 6 percent this year, he said.
“The possibility of exceeding 6 percent is there with the trend of rising food prices and other commodities such as oil,” Deputy Governor Hartadi Sarwono said in a mobile-phone text message today. Still, “Bank Indonesia won’t need to change its target. Bank Indonesia and the government are preparing policies to handle inflation. A mix of policies is important to address different factors behind inflation.”
Bank Indonesia kept its benchmark interest rate at a record-low 6.5 percent this week even after consumer prices rose at the fastest pace in 20 months, betting measures such as higher bank reserve requirements will keep inflation in check. The country’s stocks fell today on concern the central bank has fallen behind neighbors in taking action to curb inflation.
Other Policies
“By saying core inflation may be below 5 percent, Bank Indonesia is indirectly saying that it won’t rate its interest rate,” said Juniman, chief economist at PT Bank Internasional Indonesia, who goes by one name. “They have other policies such as raising the reserve rate.”
The Philippines and Indonesia are the only two major Southeast Asian economies using interest rates as a policy tool that didn’t raise rates last year. Indonesia ordered banks to set aside more cash as reserves to reduce inflationary pressure in 2010, while refraining from joining Malaysia, Thailand and India in boosting borrowing costs.
The Jakarta Composite Index dropped 2.8 percent at the 4 p.m. local-time close, the sharpest decline since May 25.
Consumer prices rose 6.96 percent last month from a year earlier, a report showed Jan. 3, exceeding the 6.71 percent median forecast in a Bloomberg survey of 14 economists. Core inflation was 4.28 percent in December, easing from 4.31 percent the previous month.
Inflation may quicken to 7 percent this year, Kontan reported, citing an official at the National Development Agency. Core inflation excludes food and fuel.
“If fuel prices rise there will be a domino effect as transportation costs will rise and that’s included in core inflation,” said Juniman. “Prices of durable goods will increase and surely this will drive core inflation above 5 percent.”
The government has allocated 1 trillion rupiah ($111 million) to stabilize food prices and 2 trillion rupiah to compensate farmers for any losses caused by climate change, such as excessive rains and floods, Coordinating Minister for the Economy Hatta Rajasa told reporters in Jakarta today.
“We don’t want bad weather to threaten our production this 2011,” he said. “We prepare everything so the output target that’s been set up by minister of agriculture can be achieved.”
The government needs to keep stock levels adequate and distribution of goods smooth to help lower inflation expectations, Juniman said.
To contact the reporter on this story: Novrida Manurung at nmanurung@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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