Indonesia May Extend Interest-Rate Pause as Inflation Slows

May 11, 2011, 4:52 AM EDT By Shamim Adam and Manish Modi

(Updates with comment from central bank in 12th paragraph.)

May 11 (Bloomberg) -- Indonesia’s central bank will probably keep interest rates unchanged for a third consecutive meeting to support the economy, allowing gains in the rupiah to reduce inflationary pressures.

Bank Indonesia will keep its benchmark reference rate at 6.75 percent, according to all 10 economists surveyed by Bloomberg News. The central bank is due to release its decision in Jakarta tomorrow.

Indonesia has refrained from boosting borrowing costs since increasing the key rate in February for the first time in more than two years, in contrast with neighbors from Malaysia to India where officials have accelerated monetary tightening. President Susilo Bambang Yudhoyono’s policy makers have extended fuel subsidies and let the rupiah climb the most in Asia after Taiwan this year to contain imported inflation.

“There’s no strong reason for Bank Indonesia to raise rates this month and by holding, it will provide an opportunity for banks to give credit and that will boost economic growth for the rest of this year,’ said Eric Alexander Sugandi, a Jakarta- based economist at Standard Chartered Plc. “We’ve adjusted the timing of the next rate increase to August.”

The Indonesian rupiah climbed to its strongest level since 2004 this month and has gained about 5 percent this year, according to data compiled by Bloomberg. The central bank is allowing the rupiah to appreciate, Bambang Brodjonegoro, head of fiscal policy at the nation’s finance ministry, said last week.

Later Move

Bank Indonesia may not raise rates this week after inflation eased for a third month in April, Brodjonegoro said in Jakarta today.

“Maybe not tomorrow but later this year, especially when Bank Indonesia feels that inflationary pressure is high,” he said. “Until now we are able to manage the inflation, but at one point in time BI has to increase interest rates since other central banks in the region have increased interest rates a couple of times.”

Consumer prices in Indonesia, Southeast Asia’s largest economy, rose 6.16 percent last month from a year earlier, slower than the 6.65 percent pace in March. Prices fell in April compared with March. Core inflation accelerated to 4.62 percent from 4.45 percent.

Policy makers from Thailand to the Philippines and Singapore are stepping up the fight against inflation through rate increases or currency appreciation as political unrest in the Middle East boosts crude oil prices.

Malaysian Rates

Malaysia raised rates last week for the first time this year and asked banks to set aside more cash as reserves, while India boosted borrowing costs on May 3 for the ninth time since the middle of March 2010.

The pressure for Bank Indonesia to adjust interest rates is “not too high” even after core inflation accelerated in April, Governor Darmin Nasution said May 6.

The central bank sees a “probability” of “slight deflation” in May and even if consumer prices rise, the gains may be small, the governor said in Jakarta today. Bank Indonesia will maintain its “tight” monetary policy stance because of “inflation pressure” in the third and fourth quarter, he said.

Indonesia’s economic growth slowed to 6.5 percent last quarter as investment eased. Gross domestic product rose 6.9 percent in the previous three months.

Chance ‘Squandered’

The growth slowdown may not be enough to keep inflation from quickening in coming quarters as food and oil costs rise, straining the budgets of Asian governments that subsidize fuel and putting pressure on countries including Indonesia to raise prices for gasoline and diesel.

Oil traded at above $100 a barrel today, and has climbed about 13 percent this year.

PT Mandiri Sekuritas predicts April was probably the last time this year that consumer prices would fall month-on-month, according to head of research Ari Pitoyo.

“The chance for the government to raise fuel prices during ‘deflation’ months has been squandered, hence should the government have no option but to raise fuel prices, we might see inflation momentarily spike up,” Jakarta-based Pitoyo said.

He is recommending investors trim stocks of financial companies, which were hurt when the government raised fuel prices in 2005. Earnings at companies such as PT Mayora Indah, which makes biscuits and candies, and PT Unilever Indonesia, the unit of the world’s second-biggest consumer-goods company, may be affected should the government raise fuel prices, threatening discretionary spending, he said.

Bank Indonesia may face an “upside surprise” in inflation in July, with the beginning of the school year occurring close to the start of the Muslim fasting month, Wellian Wiranto, an economist at HSBC Holdings Plc in Singapore, said in a research note today.

“The dependence thus far on currency appreciation to curb inflation has had limited effectiveness given the predominance of domestic consumption in the economy,” he said. “Although Indonesia’s economy continues to hum on rather uneventfully, this does not mean there is room for complacency.”

--With assistance from Novrida Manurung and Suryani Omar in Jakarta. Editors: Stephanie Phang, Greg Ahlstrand

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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