Indonesia Interest-Rate Pause `Golden Opportunity Missed' to Tame Prices
Indonesia Keeps Interest Rate Unchanged Inflation Eased
Dimas Ardian/Bloomberg
Bank Indonesia left borrowing costs unchanged, refraining from a second increase in a row after inflation eased from the highest level in almost two years.
Bank Indonesia left borrowing costs unchanged, refraining from a second increase in a row after inflation eased from the highest level in almost two years. Photographer: Dimas Ardian/Bloomberg
Bank Indonesia kept interest rates unchanged while highlighting rising price pressures, prompting some economists to question its inflation-fighting credentials.
The central bank left its benchmark reference rate at 6.75 percent yesterday, a decision predicted by 10 of 17 economists in a Bloomberg News survey, with the rest forecasting a quarter percentage-point increase. A measure of price gains excluding volatile items such as food, so-called core inflation, is starting to accelerate, the central bank said.
“We thought Bank Indonesia is finally and seriously gearing up to attain the label of being ‘on the curve’ when it comes to fighting inflation,” said Wellian Wiranto, an economist at HSBC Holdings Plc in Singapore. “Nothing builds credibility more than if they were to hike rates when inflation is not snarling, rather than wait to be forced into tightening when the inflation beast bares its fangs. We see it as a golden opportunity missed.”
The Jakarta Composite Index is down more than 4 percent this year on concern that a prolonged pause in borrowing costs may eventually prompt more aggressive tightening later that slows the economy. The rupiah closed at the highest since 2007 after the central bank said it saw scope for further gains and that the currency’s appreciation is helping to curb import costs.
Bank Indonesia yesterday said the direction of its monetary policy is still “biased toward a tightening” as it seeks to manage inflation pressures. The rupiah’s advance helped slow inflation last month from the highest level in almost two years.
‘Discordant Message’
“As much as they continue to posture towards future tightening, an immediate hike would have done a lot in strengthening their credibility,” Wiranto said. “Inflation expectation continues to head up. We see a discordant message.”
The central bank unexpectedly raised borrowing costs by a quarter point last month after opting not to join counterparts from Malaysia to India in increasing rates in 2010. Efforts to tame inflation have been sufficient and a proposed delay in the phasing out of subsidized fuel sales may restrain prices, Deputy Governor Hartadi Sarwono said last week.
The “pause after only one hike may raise concerns that BI is tackling the inflation threat only half-heartedly, especially as global energy inflation is likely to accelerate with the Middle East crisis,” said Eric Alexander Sugandi, a Jakarta- based economist at Standard Chartered Plc. “It is important for BI to continually signal to the markets its willingness to hike the policy rate further if there is any sign of an inflationary threat.”
Rising Rupiah
The rupiah is the biggest gainer in Asia in the past month against the dollar, climbing more than 2 percent, according to data compiled by Bloomberg. The Jakarta Composite Index’s decline in 2011 contrasts with the 1.1 percent gain in the MSCI Asia Pacific Index over the same period.
Consumer-price growth in Southeast Asia’s largest economy slowed to 6.84 percent in February from a year earlier, compared with a 7.02 percent pace in January, a report showed this week. Core inflation was 4.36 percent, gaining from 4.18 percent.
“We are still targeting inflation of 5 percent, plus or minus one percent, and we expect core inflation to be at that range,” Governor Darmin Nasution said yesterday.
The rupiah’s appreciation is helping to manage the impact of imported inflation and hasn’t affected export competitiveness, Bank Indonesia said yesterday, adding that there is room for it to strengthen further.
Economic Expansion
The economy expanded at the fastest annual pace in six years last quarter, and a central bank index showed consumer confidence in February held near the highest since August 2009. Indonesians were more optimistic on income and employment.
Sentiment may improve further if the government decides to extend sales of subsidized fuel to cushion the impact of rising oil prices. The administration had initially planned to gradually curb the sales from April 1 and will discuss a possible delay with parliament before making a decision, Coordinating Minister for the Economy Hatta Rajasa has said.
Oil prices have exceeded $100 a barrel, to levels not seen since 2008, as protests spreading across the Middle East and North Africa stoke concern that supplies may be disrupted. The rally in crude is temporary and the government has no plans to raise the price of subsidized fuel, Rajasa said.
Continuing with subsidized sales would curb inflationary pressures, spur growth and help the stock market, according to Ari Pitoyo, head of research at PT Mandiri Sekuritas in Jakarta. He recommends consumer stocks including instant-noodle maker PT Indofood Sukses Makmur, cigarette producer PT Gudang Garam and lender PT Bank Rakyat Indonesia.
Market Slide
Investors sold Indonesian stocks and bonds in January as the central bank kept borrowing costs steady, a pattern that Credit Suisse Group AG says may be repeated if policy makers are seen as hesitating to raise rates when needed.
The benchmark stock index fell 8 percent that month, before rising about 1.8 percent in February. Yields on benchmark 10- year government bonds rose 1.26 percentage points in January, the biggest monthly increase in almost two years, according to data compiled by Bloomberg. Inflation erodes the value of a bond’s fixed payments.
Other Asian central banks have boosted rates further since Indonesia’s increase. China and Vietnam raised borrowing costs last month, while Thailand will increase its benchmark rate by a quarter point on March 9, according to the median estimate in a Bloomberg News survey. The Bank of Korea, meeting a day later, is also forecast by economists to raise its key rate by 25 basis points to 3 percent.
Commodity Costs
In the Philippines, the only major Southeast Asian economy that hasn’t tightened monetary policy, Governor Amando Tetangco said March 1 the central bank has less scope to keep borrowing costs at a record low after oil and food costs climbed. Malaysia is also monitoring the impact of higher commodity prices on inflation and economic growth ahead of its next rate decision on March 11, Governor Zeti Akhtar Aziz said this week.
Besides its rate increase last month, Bank Indonesia has lifted lenders’ reserve requirements and tightened rules on banks’ foreign-exchange holdings to help curb price advances.
The median estimate of economists surveyed by Bloomberg News in February was for Bank Indonesia to increase the reference rate to 7 percent by the end of the second quarter and 7.25 percent by the end of the year.
To contact the reporters 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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