March Inflation Limits Bank Indonesia’s Room to Cut Interest Rates


APRIL 01, 2015

Jakarta. Inflation increased slightly in March, data from the Central Statistics Agency, or BPS, showed on Wednesday, as prices were pushed up by higher prices for fuel and rice and continued weakening of the rupiah.

Analysts said stronger inflation would limit Indonesia’s central bank’s ability to further reduce its key interest rate.

The BPS announced March’s headline inflation rate was 6.38 percent, compared with 6.29 percent a month earlier.

“This is broadly in line with our forecast and the consensus median,” said Dian Ayu Yustina, a Jakarta-based economist with Bank Danamon Indonesia.

A Reuters poll expected a March rate of 6.40 percent.

“The biggest contributor to the inflation is the increase in the regulated fuel price in the beginning of March. Inflation pressure also came from the price of rice and onion due to supply problems,” she said.

Dian said Indonesia would hit the rice harvesting season in April, which could see price pressure from the staple — which bears a significant weight in the consumer price index calculation — ease.

“However, since we have a quite significant increase in the regulated fuel price at the end of March [by 7.4 percent for low-grade gasoline and 7.8 percent for diesel], the deflationary impact of the harvesting season may be offset by the direct effect of the recent fuel price hike plus the second-round effect of the previous hike. Therefore we may see further small inflation next month,” she said.

The administration of President Joko Widodo has reformed the fuel price policy to a regulated price that can fluctuate according to the global oil price and the exchange rate.

Looking forward to the rest of the year, analysts Wai Ho Leong and Angela Hsieh from Barclays said the path of inflation was still benign.

They projected inflation to average 6.5 percent in the first quarter of 2015, roll down to 6.3 percent in the second and hit 5.6 percent in the third quarter, before falling further to the central bank’s target range of 3 to 5 percent from November.

“With inflation remaining benign, we now expect Bank Indonesia to reduce its policy rate once more — by 25 basis points in late of the second quarter of 2015,” the Barclays economists said.

Taking into account low inflationary pressures, the central bank trimmed its key interest rate, the BI rate, by 25 basis points in February to 7.50 percent.

It kept the rate steady in March, which analysts said was necessary to keep the rate attractive amid the falling rupiah.

Bank Indonesia’s next board of governors’ monthly meeting to set its key policy rate is scheduled for April 14.

Wellian Wiranto, an economist with OCBC Bank, said “it will remain rather risky for Bank Indonesia to ease monetary policy.”

He said Bank Indonesia lacked significant pressure to cut the rate further, which the business community has demanded to help ease financing cost burdens and help spur growth.

Wellian said the slightly higher inflation may be “a good thing.”

“Hopefully, that will temper some of the enthusiasm out there for ‘quick-and-easy’ rate cuts to boost growth at the expense of sensibility and stability. The capacity to use monetary policy to pump-prime the economy remains too dependent on pump prices, ultimately,” he said.