Rate Hike in Indonesia

February 4, 2011

Bank Indonesia became one of the last Asian central banks to begin raising interest rates today with a hike of 25 basis points in its benchmark to 6.75%.  The move is being characterized as a preemptive step to curb the renewed onset of rising inflation expectations.  Due mostly to food price pressures, CPI inflation has accelerated to 7.02% from 6.96% in December and 6.33% in November, and 2.8% at end-2009.  Officials had delayed rate hikes for fear of promoting unwanted excessive capital inflows and upward pressure on the rupiah.  Higher reserve requirements and other controls were tried instead in lieu of a rate hike to counter inflation.  But rupiah had declined since the January meeting, and evidence has now appeared that higher actual inflation is boosted expected inflation.  CPI inflation is targeted by the central bank at 4-6%.  Officials expect on-year GDP growth in the final quarter of 2010 to be somewhat higher than the 5.8% reading in 3Q10. 

The last time the benchmark interest rate was increased, a 25-bp hike to 9.5% on October 7, 2008, CPI inflation exceeded 12%.  Starting in December 2008 and for nine consecutive months to August 2009, the interest rate was slashed by a total of 300 basis points to 6.5%, where it had remained until today. Having finally made an initial move and considering that such is not being done exclusively as a normalizing move but in the face of rising expected inflation, several more increases appear likely in 2011.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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