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BI to spur growth with low rates
March is likely to see the Indonesian economy experiencing deflation as the price of rice drops due to the harvest season
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March is likely to see the Indonesian economy experiencing deflation as the price of rice drops due to the harvest season.
Analysts predicted that deflation would provide the central bank with room for maneuver to hold
its benchmark interest rate steady to spur economic growth.
March may see deflation in consumer prices ranging from 0.1 percent to 0.24 percent from
February, which will cause year-on-year inflation to drop below3.5 percent from 3.81 percent
booked in February, they said over the weekend.
“We expect a month-on-month deflation in March reflecting falling food prices, in particular
rice, due to an improvement in supply, while the appreciation of the rupiah helps contain imported inflation,” said Eric A. Sugandi, an economist at Standard Chartered Bank.
Rice is the main staple food for about 230 million Indonesians, which makes a significant contribution to the rate of inflation, according to the Central Statistics Agency (BPS).
Bank Indonesia (BI) has kept its benchmark interest rate at 6.5 percent for the seventh-straight
month since September due to low inflation. A low BI rate will help banks to cut lending rates to spur growth.
BI estimates growth will expand between 5.5 percent and 6 percent this year, up from 4.5 percent booked in 2009.
BI will hold a meeting to determine its rate on April 6. The BPS will announce the official figure for March consumer prices on April 1.
The rupiah was traded at Rp 9,123 per US dollar as of 4:43 p.m. Friday in Jakarta, Bloomberg reported. The currency has appreciated 2.3 percent this month.
“We believe inflation remains manageable and may still be below 4 percent on a year-on-year basis by the end of the first quarter, and below 5 percent by the end of second quarter,” Eric said.
Bank Danamon economists Helmi Arman and Anton Gunawan said in a report that a decline in rice and sugar prices would lead to a lower inflation figure. They expect BI to keep its rate unchanged at 6.5 percent.
“BI currently doesn’t seem too worried about inflation. Its latest move to cut the issuance of one-month SBIs [BI bills] has had an impact similar to a rate cut as it led to a bull-increase in money market interest rates. We maintain our basic case for the first rate hike to come in early 2011,” they said.
BI in early March announced it would change the periodicity of the auction of BI bills from a weekly basis to a monthly one, and then focus on three-month and six-month bills, with these changes being implemented in June after a transition period starting on March 10.
Eric said stronger inflationary pressure would emerge in the second half this year due to a higher demand for goods during Ramadhan and Christmas.
