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Inflation surges but no alarm bells at Bank of Indonesia

Publication Date : 04-02-2014

 

Inflation was up in January as bad weather and flooding drove up food prices. Bank Indonesia (BI), however, saw the rise as “normal”, hinting that the central bank may keep the borrowing cost steady in its board of governors meeting next week.

Inflation surged 1.07 per cent month-to-month in January, taking year-to-year inflation to 8.22 per cent, the Central Statistics Agency (BPS) reported on Monday.

BPS head Suryamin explained that accelerated monthly inflation – which was slightly higher than BI’s earlier prediction of 0.85 to 1 per cent — was driven by bad weather and floods, which disrupted supply and the distribution of certain food commodities such as fish, eggs and tomatoes.

Certain vegetables such as spinach and kale saw their prices soar by between 80 per cent and 140 per cent in some provinces, he said, adding that the price increase of non-subsidized liquefied petroleum gas (LPG) also had an effect.

“The monthly inflation figure of 1.07 per cent was still within the normal perimeter, in line with its seasonal pattern during the rainy season, which occurs every January to February,” BI Senior Deputy Governor Mirza Adityaswara wrote in a text message on Monday.

Annual core inflation — an indicator of long-term price levels that excludes prices of volatile foods and government-controlled commodities — surprisingly was on the downside, as it stood at a five-month low of 4.53 per cent in January, declining from 4.98 per cent a month earlier.

Core inflation is normally used by the central bank to decide on any adjustments to its policy rate.

The central bank, which hiked its key interest rate by a cumulative 175 basis points to 7.5 per cent last year, will decide on any adjustments to the BI rate in its board of governors meeting on February 13.

BI should not panic on account of the inflation surge in January, said Gadjah Mada University economist A. Tony Prasetiantono, who suggested that the central bank keep its policy rate unchanged next week.

“Our experience in the past year showed that this inflationary pressure may be a one-off; inflation surged once, then it would decline again,” he said on Monday.

As inflation is showing a declining trend, with price levels slated to return to around 4.5 per cent due to base price effects from the fuel-price hike, other economists have predicted that soon there would be enough reasons for BI to start cutting its interest rate and to shift its focus to spur growth.

“At the current BI policy rate of 7.5 per cent, the real policy rate will be more than 3 per cent in the third quarter — very high by Indonesian standards,” Credit Suisse economist Robert Prior-Wandesforde wrote in a note after the announcement of inflation data.

Such a level of real policy rate “is high enough in our view to trigger 100 basis points of rate reductions without jeopardising the currency too much”, he argued.

 

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