Indonesia Inflation Rate at 4-Year High as Economy Set to Slow

Indonesia’s inflation accelerated to the highest level in more than four years in July, adding to risks facing Southeast Asia’s largest economy as growth cools.

Consumer prices rose 8.61 percent in July from a year earlier, after a 5.9 percent gain in June, the Statistics Bureau said in Jakarta today. That exceeded all estimates in a Bloomberg survey of 23 economists. Gross domestic product probably grew 5.9 percent last quarter from a year earlier, the first drop below 6 percent since March 2010, a separate survey showed before a report due tomorrow.

Higher costs may hurt domestic consumption that has been the driver of growth in Indonesia, at a time of falling demand for the country’s commodity exports. Bank Indonesia has already raised its benchmark interest rate by 75 basis points in the past two meetings to fight inflation.

“Measures should be taken to stabilize inflation, contain the current account deficit, and minimize financial stability risks,” said Chua Hak Bin, an economist at Bank of America Corp. in Singapore, who expects another 25 basis-point rate increase this year. “Inflation is driven by a fuel price adjustment, not from demand.”

The Jakarta Composite Index and 10-year bonds pared early gains after the inflation data, while the rupiah was little changed. The rupiah has dropped more than 6 percent this year, and led emerging-market currency declines in July, according to data compiled by Bloomberg.

It may weaken a further 3 percent to 4 percent, Michael Tjoajadi, chief executive officer of PT Schroder Investment Management Indonesia, said in an interview in Jakarta yesterday. Bank Indonesia has allowed the currency to decline, Deputy Governor Perry Warjiyo said last month, and the central bank said it sees the rupiah finding a new equilibrium.

Food Imports

The government raised subsidized fuel prices on June 22 for the first time since 2008, resulting in an increase in distribution costs across an archipelago of 17,000 islands. It has tried to address higher prices by opening up the country to more imports of food such as shallots and scrapping import quotas for cattle.

The food imports will arrive in August and Bank Indonesia is optimistic monthly inflation will slow to about 0.9 percent in August from a 3.29 percent pace in July, Warjiyo said today.

The central bank has lowered its economic growth forecast for 2013 to about 5.8 percent to 6.2 percent, from a previous estimate of as much as 6.6 percent. The World Bank also cut its forecast for economic growth to 5.9 percent from a previous estimate of 6.2 percent for 2013.

Export Decline

Exports fell 4.5 percent in June from a year ago, the Statistics Department said, compared with a survey median for a 1 percent increase. Imports dropped 6.8 percent in the same period, more than the median 0.1 percent decline predicted by economists, leading to a trade deficit of $847 million. Foreign direct investment rose 18.9 percent last quarter from a year earlier, the slowest pace since 2010.

“The softness in imports came despite a helpful base effect and probably says a lot about the state of domestic demand in the country,” said Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore, said in a note today. Tomorrow’s “GDP numbers will provide more detail on this front but we expect to see a further decline in investment growth.” With the rupiah under pressure, Credit Suisse expects one more 25-basis-point rate increase this quarter, he said.

Given current conditions, the probability of an increase in the benchmark rate is lower, Warjiyo said on July 26.

“It’s not easy to make a decision at this point because BI needs to control two things,” said Eugene Leow, an economist at DBS Group Holdings Ltd. in Singapore. “To control inflation and external stability needs a higher rate but to support the economy, you don’t really want to go with a higher rate.”

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