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Bank Indonesia Begins Battle to Contain Accelerating Inflation

Indonesia’s central bank may add to its first interest-rate increase in more than two years after falling in danger of being judged too slow to contain accelerating inflation.

The next move may come as soon as next month, according to PT Bank Danamon Indonesia. HSBC Holdings Plc expects Bank Indonesia’s benchmark reference rate to be raised by half a percentage point by April after Governor Darmin Nasution unexpectedly boosted it to 6.75 percent from 6.5 percent yesterday. The move was the first increase since October 2008.

The rupiah, Asia’s fourth-worst performing currency in the past year among the 10 major Asian currencies tracked by Bloomberg News, climbed to a four-week high and bonds advanced after Indonesia joined Asian nations from India to South Korea in increasing rates. Indonesia may have more room to boost rates even at the risk of attracting more currency inflows as the rupiah has risen only 3.5 percent in the past 12 months, less than a third of the gain in Malaysian and Singapore currencies.

“There has been an acute sense of immediacy with regard to the inflation risk,” Wellian Wiranto, a Singapore-based economist at HSBC, said in an e-mailed note yesterday. “We see two more rate hikes in the coming months.” He forecasts the policy rate at 7.25 percent by April.

The rupiah rose 0.4 percent to 8,993 per dollar at close of trading in Jakarta yesterday, from 9,025 when local financial markets were last open on Feb. 2. The currency had strengthened to as much as 8,990, the highest since Jan. 6. Ten-year government bond yields fell one basis point to 8.91 percent.

Stocks Gain

The Jakarta Composite Index rose 0.4 percent. It has slid 7.3 percent from its Dec. 9 record high as investors were concerned the central bank has fallen behind regional peers in boosting rates to cool inflation.

The Reserve Bank of India on Jan. 25 raised rates for the seventh time in a year. Thailand’s central bank increased the one-day bond repurchase rate on Jan. 12 for the fourth time since the start of July while the Bank of Korea raised its benchmark on Jan. 13 for the third time since the global financial crisis.

Consumer prices in Indonesia, Southeast Asia’s largest economy, rose 7.02 percent in January from a year earlier, the most since April 2009. Core inflation was 4.18 percent in January, easing from 4.28 percent the previous month.

Inflation Expectations

Bank Indonesia’s decision is aimed at curbing inflation expectations, which are being stoked by volatile food prices and an increase in global commodity costs including oil, Governor Darmin Nasution said in a statement yesterday.

“Ideally we should expect to see the next 25 basis point rate hike being done in March,” Helmi Arman and Anton Gunawan, economists at PT Bank Danamon, said in a note yesterday. “As the harvest season approaches, the month-on-month headline will be low and this could temporarily divert the market’s attention away from inflation.”

That may tempt Bank Indonesia to “save the remaining 25 basis point hike for another rainy day,” which could be in May or June, the economists said.

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, according to the statement.

With Indonesia’s rate increase, the Philippines is the only major Southeast Asian economies using interest rates as a policy tool that hasn’t raised its borrowing cost.

Higher Reserves

Among the steps the central bank had taken so far to control inflation was to order lenders to set aside 5 percent of their total foreign-exchange holdings as reserves from March this year, from 1 percent currently. In January, Bank Indonesia reintroduced a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows.

Inflation erodes the spending power of the poor. The World Bank estimates 29 percent of Indonesians earn less than $2 a day.

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.

Indonesia’s economy grew 6.3 percent last quarter from a year earlier, accelerating from a 5.8 percent rate in the three months through September, according to the median estimate of 12 economists surveyed by Bloomberg News. The government will release fourth-quarter economic data on Feb. 7.

Indonesian stocks’ decline is a buying opportunity as the rural-based economy will benefit from rising commodity prices, Wilianto Ie, an analyst at Nomura Holdings Inc., said last month. Concerns about inflation getting out of hand due to “policy slippage” are unfounded and the slump in Indonesia stocks is a “window of opportunity,” said Mun Hon Tham, an analyst at Daiwa Securities Capital Markets Co.

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