Bank Indonesia May Keep Raising Rates to Curb Price Pressures
Bank Indonesia May Keep Raising Rates Curb Price Pressures
Edwin Tuyay/Bloomberg
Amando Tetangco, governor of Bangko Sentral ng Pilipinas.
Amando Tetangco, governor of Bangko Sentral ng Pilipinas. Photographer: Edwin Tuyay/Bloomberg
Indonesia’s central bank may continue to raise interest rates after its first increase in three years last week aimed at curbing inflation that risks hurting household spending.
Bank Indonesia boosted its benchmark reference rate by 25 basis points to 6.75 percent on Feb. 4, and economists from UBS AG and Royal Bank of Canada are among those predicting borrowing costs will reach 8 percent in 2011. The increase came before the government releases a report today that is forecast to show the economy grew last quarter at the fastest pace in 2 1/2 years.
Higher borrowing costs in a nation where the World Bank estimates 29 percent of the population earn less than $2 a day may help anchor inflation expectations and support its currency and longer-term bonds, according to Citigroup Inc. With Indonesia’s rate increase, the Philippines is the only major Southeast Asian economy using interest rates as a policy tool that hasn’t raised its borrowing cost.
“Hiking rates now prevents a sharp weakness in the currency and a selloff in the markets,” said Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup, who expects another half percentage point of increases this year. “The anxieties that Bank Indonesia is behind the curve should lessen. A gradual rate-hike cycle should not dampen growth as the economy is still doing well.”
Inflation Concern
The Jakarta Composite Index had slid about 8 percent as of Feb. 2 from its Dec. 9 record high as investors were concerned the central bank has fallen behind regional peers in boosting rates to cool inflation. It rose 0.4 percent on Feb. 4. The rupiah, Asia’s fourth-worst performer in the past year among the 10 major Asian currencies tracked by Bloomberg News, climbed to a four-week high.
In a statement announcing its rate decision, Bank Indonesia said it will keep a “close watch on future inflation developments and strengthen the rupiah exchange- rate policy in line with measures to curb future inflationary pressures.”
Benchmark 10-year government notes advanced after the rate increase amid optimism the central bank’s actions will damp price pressures. Two-year bonds declined. Short-maturity bonds are more sensitive to central bank rate expectations than bonds with longer tenors, which typically decline on signs of accelerating inflation because it erodes the value of debt’s fixed payments.
Growth Rate
Indonesia’s economy grew 6.3 percent last quarter from a year earlier, accelerating from a 5.82 percent rate in the three months through September, according to the median estimate of 13 economists surveyed by Bloomberg News.
The central bank refrained from raising rates since 2008 as President Susilo Bambang Yudhoyono targeted annual average economic growth of 6.6 percent through the remainder of his term ending in 2014. Companies from PT Bank Pan Indonesia to AirAsia Bhd. are counting on rising demand in the world’s fourth-most populous nation to boost their businesses.
Bank Indonesia maintained its inflation forecast for 2011 in the range of 4 percent to 6 percent and said the economy will probably expand by 6 percent to 6.5 percent this year. Higher borrowing costs aren’t likely to hurt the Indonesian economy, said Vishnu Varathan of Capital Economics (Asia) Pte.
“There is no compelling sign that the economy is slowing dramatically,” said Varathan, a Singapore-based economist. “Domestic consumption continues to be strong. The real risk is that inflation would affect private consumption if Bank Indonesia didn’t prudently decide to raise interest rates.”
Rising Rates
Brian Jackson, Hong Kong-based senior emerging markets strategist at Royal Bank of Canada, predicts the central bank will add another 1.25 percentage points of increases this year, starting at the next meeting in March.
“With inflation well above the target range and likely to stay high in coming months, Bank Indonesia clearly has more work to do,” Jackson said. He expects the rupiah to strengthen to 8,500 per dollar by end-2011, from 8,992 on Feb. 4.
“This theme of tolerating currency appreciation to help curb price pressures also underpins our forecast for other emerging market Asian currencies to strengthen this year,” Jackson said.
In the Philippines, where inflation accelerated to the fastest pace in four months in January, the central bank has kept the benchmark rate at 4 percent for more than a year. Bangko Sentral ng Pilipinas policy makers meet on Feb. 10 and will keep borrowing costs unchanged, according to 10 of 11 economists surveyed by Bloomberg News.
The central bank may raise inflation forecasts this week, Governor Amando Tetangco said Feb. 4, adding that he doesn’t see an immediate need to raise interest rates.
“Some have raised the point that the Philippine central bank is behind the curve,” said Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila. “Especially now that all over the world there is a fear of inflation, if you take your time, you may have to do more tightening than originally planned.”
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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