Indonesia's Inflation Accelerates to Fastest Pace in Two Years

By Aloysius Unditu and Arijit Ghosh

Oct. 6 (Bloomberg) -- Indonesia's inflation accelerated to the fastest pace in two years in September, sustaining pressure on the central bank to increase borrowing costs for a sixth straight month.

Consumer prices rose 12.14 percent from a year earlier last month, after gaining 11.85 percent in August, the Central Statistics Bureau said in Jakarta today. That compares with the 11.96 percent median forecast of 18 economists surveyed by Bloomberg News.

Prices rose in September as the nation with the world's largest Muslim population prepared to celebrate the end of the fasting month of Ramadan. That may prevent Bank Indonesia from joining other Asian central banks in reversing interest-rate increases even after the government said yesterday the global credit crisis is slowing exports and may affect growth.

``They are not in a position to cut interest rates but I think they will change their stance toward the end of the year,'' said Tomo Kinoshita, chief economist for Asia outside Japan at Nomura Holdings Inc. ``Domestic demand has really been robust in Indonesia, which has not been seen in other parts of Asia.''

Indonesia's central bank may raise its policy rate tomorrow to 9.5 percent, the highest in 1 1/2 years, according to 14 of 19 economists surveyed by Bloomberg News.

The rupiah's decline may also prompt the central bank to increase its policy rate, said Sim Moh Siong, a strategist with Citigroup Inc. in Singapore. The currency has slipped 1.3 percent against the dollar in the past five days.

Stabilize Rupiah

``Further gradual rate hikes for the rest of the year remain highly possible to keep inflation in check and to stabilize the rupiah,'' Sim said.

Still, Bank Indonesia and the government are ``increasing cooperation'' to limit the impact of the global liquidity squeeze on Southeast Asia's biggest economy, Governor Boediono said yesterday in Jakarta. The credit shortage may last as long as a year, he said.

Consumer prices rose 0.97 percent in September from a month earlier, the statistics agency said. Prices increase during Ramadan as Indonesian Muslims travel more to visit relatives and spend more money to prepare feasts for Id-ul-Fitr, which marks the end of the fasting month.

Two price increases in liquefied petroleum gas also led to an acceleration of inflation. PT Pertamina, the state oil company, raised the price of LPG sold in 12-kilogram (26-pound) canisters used by non-low-income households by 24 percent in July and 9.5 percent in August.

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