BI Expected to Keep Tight Policy as Inflation Pressure Remains
Jakarta. Bank Indonesia, the country' central bank, will likely maintain its benchmark interest rate when its board of governors meets next week, economists say, despite July's headline inflation accelerating at a higher than expected pace as prices of core goods and services showed sign of easing.
The annual inflation rate remained at 7.26 percent in July, due to higher prices in volatile foods and transportation costs following the Idul Fitri celebration, data from the Central Statistics Agency (BPS) showed on Monday. The rate matches the June pace and was higher than Bank Indonesia's expectation, which had expected an annual pace of 7.13 percent.
"Household consumption of [volatile] foods is inelastic to prices. Despite higher prices, people keep consuming those Ramadan-related goods. That made July inflation stay the same,” he said, noting 40 percent to 45 percent of household consumption consists of food items.
Still, the core inflation — which excludes administered price and volatile food prices, dropped to 4.86 percent from 5.04 percent in June. This allows the central bank to maintain its benchmark interest rate, known as the BI rate, at the next board of governors meeting on Aug. 18, Eric said.
The central bank is under pressure to lower interest rates in order to boost the country's slowing economy. Indonesia's gross domestic product grew at 4.7 percent year on year in the January to March period -- the slowest in five years. Economists have estimated the second quarter's GDP — which will by announced by the BPS on Wednesday — is likely to remain at below 5 percent, due to low commodity exports and sluggish public and private investment.
But, the prospect of interest rate hikes by the US Federal Reserve in September rendered the cut impossible, as it would further undermine the value of Indonesian financial assets and, in turn, trigger capital outflow.
Moreover, inflation pressure would likely persist for the rest of this year and into the next.
"A weak outlook for the rupiah means imported inflation may trend higher. Food prices also present risks amidst the anticipated impact from El Nino going into 2016," said Gundy Cahyadi, a Singapore-based economist at DBS, referring to a longer dry season in Indonesia and the possibility of massive crop failure.
El Nino — a climate phenomenon due to rising sea-surface temperatures in the Pacific — is likely to push back the rainy season to December, from the usual October, the National Disaster Mitigation Agency (BNPB) said last week. This would delay the planting season for rice, the country's staple food, risking shortages and driving up prices without government intervention on rice imports.
Bank Indonesia targets inflation to be between 3 percent and 5 percent in 2015 and 2016. The rupiah was traded at 14 percent lower than a year ago, data from Bank Indonesia showed on Monday.
GlobeAsia
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