By Aloysius Unditu and Novrida Manurung
Oct. 5 (Bloomberg) -- Indonesia’s central bank kept its benchmark interest rate unchanged for a second straight month amid signs of a pickup in consumer prices.
Bank Indonesia held its reference rate at 6.5 percent, Deputy Governor Budi Mulya told a news conference in Jakarta today. The decision was expected by all 22 economists in a Bloomberg News survey.
The central bank stopped cutting rates in August after slashing borrowing costs for nine straight months to help shield Southeast Asia’s largest economy from the global recession. Inflation unexpectedly accelerated last month and is expected by economists to breach Bank Indonesia’s target next year.
“As growth begins to accelerate, upward price pressures will build quickly,” said James Lord, an economist at Capital Economics Ltd. in London. “We expect rates to start to move up soon, most likely from January. But there is a significant risk -- a 30 percent chance -- that Bank Indonesia moves rates up before year end.”
Bank Indonesia raised its forecast for economic expansion this year to 4.3 percent from an earlier estimate of 4 percent. Growth in the third quarter is predicted at 4.2 percent, up from 4 percent in the previous three months. Still, growth has slowed from last year, when the economy expanded 6.1 percent, as the global recession erodes demand for exports.
Economic Recovery
A benchmark interest rate of 6.5 percent “is conducive for the process of economic recovery” and will help spur lending, Bank Indonesia’s Mulya said.
The $514 billion economy may expand as much as 5.5 percent next year, the central bank also said today. A recovery in the world economy, continued strong domestic consumption, and increased investment will accelerate growth, Bank Indonesia said.
Consumer prices climbed 2.83 percent last month from a year earlier, after rising 2.75 percent in August, the Central Statistics Bureau said in Jakarta on Oct. 1. Prices advanced 1.05 percent in September from August, the biggest increase in 14 months.
Inflation may accelerate to between 4 percent and 6 percent next year compared with this year’s estimate of 3.5 percent to 5.5 percent, the central bank said today.
Inflation may quicken in the coming months and into 2010 as the government raises energy prices, said Helmi Arman, an economist at PT Bank Danamon Indonesia in Jakarta. Crude oil price has gained 57 percent this year, increasing the cost of fuel and electricity subsidies. Oil may average $70 a barrel this year, the central bank said today.
Electricity Prices
PT Perusahaan Listrik Negara, Indonesia’s state utility, on Sept. 9 said it’s proposing an increase in electricity tariffs of as much as 30 percent next year.
Bank Indonesia slashed its policy rate by a cumulative 300 basis points from December to August as inflation slowed to a nine-year low of 2.71 percent in July.
Inflation eased in the months before September amid stable food costs. The price of rice, the staple for Indonesia’s 240 million people, held at 7,550 rupiah ($0.78) a kilogram in September from August, according to data from PT Food Station Tjipinang Jaya, Indonesia’s biggest market for the grain.
Danamon’s Arman expects consumer prices to gain 6.7 percent next year, prompting Bank Indonesia to commence incremental 25- basis-point increases in its reference rate toward 7.5 percent starting in March.
Earthquake Damage
Arman said a 7.6-magnitude earthquake that struck off Indonesia’s Sumatra island on Sept. 30 was unlikely to have any major impact on inflation as the three regions hit by the temblor only have a 2.7 percent weight in the nation’s consumer price index.
The death toll as of 9 a.m. today was 603, Indonesia’s National Disaster Management Agency said on a notice board at an operations center in the capital of West Sumatra province. At least 30,630 homes were destroyed, it said.
Central banks across Asia have stopped cutting interest rates and are signaling their next moves may be to increase borrowing costs as the region leads the world out of the deepest global slump since the Great Depression.
Bank Negara Malaysia on Aug. 25 kept its benchmark interest rate unchanged at 2 percent for a fourth straight meeting amid signs the economy is stabilizing. Bangko Sentral ng Pilipinas maintained the rate it pays lenders for overnight deposits at 4 percent for a second meeting on Oct 1.
“Bank Indonesia will likely wait for more signs that the global recovery is on track before hiking,” said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France’s Credit Agricole SA.
To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@blomberg.net Novrida Manurung at nmanurung@bloomberg.net
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