Indonesia Stocks Set for Biggest Two-Day Loss in Seven Months on Inflation

Indonesia’s stocks slumped, driving the benchmark index to its biggest loss in more than seven months, on concern the central bank has fallen behind regional neighbors in taking action to curb inflation.

PT Bank Mandiri, the nation’s biggest lender by assets, tumbled 4.5 percent and PT Bank Rakyat Indonesia, the second largest, lost 5.3 percent. Inflation may quicken to 7 percent this year, Kontan reported, citing a government official. Bank Indonesia kept its benchmark interest rate at a record low for a 17th meeting late on Jan. 5.

The Jakarta Composite index slid 2.8 percent to 3,631.45 at the 4:00 local-time close, the most since May 25 and the biggest drop in Asia. The retreat adds to yesterday’s 1.3 percent loss, while the gauge dropped 2 percent this week.

“People are concerned about inflation,” said Herbie Mohede, who helps manage $144 million at PT Samuel Aset Manajemen in Jakarta. “If inflation accelerates it may prompt Bank Indonesia to raise its reference interest rate sooner than expected.”

The benchmark gauge soared 46 percent last year, the best performance among Asia’s 10 biggest markets and adding to 2009’s 87 percent gain, as the nation’s economic growth expanded and the central bank kept borrowing costs at the lowest since the reference rate’s introduction in July 2005.

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. A rate increase would risk luring more capital as Europe’s sovereign credit woes and a U.S. unemployment rate that remains above 9 percent restrain growth in developed markets, spurring funds to seek better returns in emerging economies.

Food Prices

Bank Indonesia maintained the rate at 6.5 percent at the meeting this week. Consumer prices rose 6.96 percent in December from a year earlier, the fastest pace in 20 months.

Indonesia’s consumer price index may gain 7 percent this year because of rising commodity prices, Kontan reported, citing Bambang Prijambodo, director of macro planning at the National Development Planning Agency. Syahrial Loetan, the agency’s ministerial secretary, didn’t return a call to his mobile phone.

World food prices advanced to a record in December, partly driven by higher sugar prices, the United Nation’s Food and Agricultural Organization reported this week. The world may face social unrest including food riots in April as grain prices increase, Philippe Chalmin, an economic adviser to the French government, said yesterday.

Banks Slump

A gauge tracking financial shares tumbled 3.7 percent, the most among the nine industry groups on the Jakarta Composite. Bank Mandiri declined 4.5 percent to 6,400 rupiah and Bank Rakyat slipped 5.3 percent to 9,800 rupiah, a four-month low. PT Bank Negara Indonesia, the nation’s third-biggest state-run bank, dropped 5.3 percent to 3,350 rupiah.

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. A recovery from the 2009 global slump has quickened inflation and raised the risk of asset bubbles in the region, prompting China, India, South Korea Thailand, Malaysia and Vietnam to boost borrowing costs in 2010.

PT Perusahaan Perkebunan London Sumatra Indonesia, a palm oil producer and Indonesia’s second-largest listed plantation company, slid 2.4 percent to 12,000 rupiah, a fifth day of losses.

Palm oil dropped after a rally to a 34-month high narrowed the discount to soybean oil, boosting the appeal of the rival oil for use in food and fuels. Palm oil futures declined 1.7 percent to 3,797 ringgit ($1,237) a metric ton in Kuala Lumpur.

PT Aneka Tambang, a state-owned gold and nickel producer, declined 4 percent to 2,375 rupiah. Immediate-delivery bullion lost as much as 0.4 percent to $1,365.85 an ounce.

To contact the reporter on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net

To contact the editor responsible for this story: Reinie Booysen at rbooysen@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.