Indonesia Raises Rate a Fourth Time to Tame Inflation

By Aloysius Unditu and Arijit Ghosh


Aug. 5 (Bloomberg) -- Indonesia's central bank raised its benchmark interest rate for a fourth straight meeting to tame inflation running at the fastest pace in almost two years.

Governor Boediono and his seven colleagues increased the policy rate by a quarter point to 9 percent, Bank Indonesia said in a statement in Jakarta today. That matched the forecast of 20 of 22 economists in a Bloomberg News survey.

Asian central banks from Pakistan to the Philippines are raising borrowing costs as soaring fuel and food costs fan inflation across the region. Boediono, governor for less than three months, needs to get runaway prices under control to help the 50 percent of Indonesia's 243 million people who survive on less than $2 a day.

``Indonesia may hold its monetary policy tightening cycle longer than the rest of Asia,'' said Christy Tan, a currency strategist at Bank of America Corp. in Singapore. ``The signals they are sending that they will hike in a measured manner are a way to manage and anchor inflation expectations going forward.''

Stocks fell after the announcement. Indonesia's benchmark index dropped as much as 3.3 percent and was trading down 3 percent at 3:25 p.m. in Jakarta.

Consumer prices in Indonesia jumped 11.9 percent in July, beating estimates for an 11.2 percent gain, the Central Statistics Bureau reported last week. Food costs increased 19.9 percent, the most in more than a decade.

Indonesia's wholesale-price inflation accelerated to 34.7 percent in June, the Central Statistics Bureau said today. That's the fastest pace in nine years.

`Upside Risk'

The momentum in wholesale-price inflation ``suggests that cost-push inflationary pressures are sizeable and could create upside risk to our consumer-price inflation forecast'' of 12.7 percent for this year, Cem Karacadag, an economist at Credit Suisse in Singapore, said in a note to investors today.

Boediono last week said Bank Indonesia would use ``all instruments'' at its disposal to tame price pressures in Southeast Asia's largest economy. The central bank aims to bring inflation down to between 6.5 percent and 7.5 percent in 2009 from a range of 11.5 percent to 12.5 percent this year.

``The high risk of inflationary pressures was the main consideration'' in raising rates, Bank Indonesia said in a statement today. Monetary policy is also equipped ``with instruments such as the control of rupiah volatility and the absorption of market liquidity through market operations.''

Not the Last

Bank Indonesia has increased its key rate by one percentage point since it started raising borrowing costs in May. Today's move may also help manage price expectations as the world's most populous Muslim nation prepares to celebrate Id-ul-Fitr following the fasting month of Ramadan that begins in September.

``We haven't seen the last'' of the rate increases, said Helmi Arman, an economist with PT Bank Danamon Indonesia in Jakarta. ``The risk is more to the upside'' for the central bank not meeting its inflation forecast for next year, he said.

President Susilo Bambang Yudhoyono's government raised fuel prices by about 30 percent in May to reduce its burden of capping pump costs. That made it more expensive to transport food, steel and cement across the 18,000 islands that make Indonesia the world's largest archipelago.

Bank Indonesia in May was the first central bank in Southeast Asia after Vietnam to raise borrowing costs this year. Vietnam increased its benchmark rate in January. India on July 29 raised its policy rate by a more-than-expected half point as inflation accelerated to the fastest pace since 1995.

Stronger Currency

The appreciation of the rupiah, the second-best performing among Asia's 10 most-traded currencies outside Japan in the past month, helped Bank Indonesia today avoid a half-point increase in rates.

``To reduce the negative impact on growth we will use all available instruments in our arsenal including exchange-rate policy,'' Bank Indonesia Deputy Governor Hartadi Sarwono said on July 24. ``This will reduce excessive increase of interest rates. This also explains why we prefer gradual rate increases.''

The rupiah rose as much as 0.1 percent and was unchanged at 9,087 against the dollar at 2:52 p.m. in Jakarta.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Aloysius Unditu in Jakarta at aunditu@bloomberg.net