Inflation in May rose slightly below expectation, still providing room for the central bank to hold its benchmark interest rate for the tenth straight month this week to support economic growth.
Inflation rose 4.16 percent in May from a year earlier, the Central Statistics Agency (BPS) reported Tuesday. The figure was higher than 3.91 percent in April.
Analysts had predicted a 4.2 percent increase on average.
Bank Indonesia (BI) said it will meet on Thursday, a day earlier than scheduled, to announce its economic assessment. BI will determine its rate during the meeting.
BI previously kept its benchmark rate for the ninth straight month at 6.5 percent since September 2009.
Low interest rates should reduce borrowing costs for businesses, helping them to expand and spur economic growth.
“There were no surprises today as May inflation, at 0.29 percent month-to-month and 4.16 percent year-on-year, was close to consensus and our expectation,” said Bank Danamon economist Helmi Arman.
“Generally inflation is still mild by Indonesian standards,” he added.
Finance Minister Agus Martowardojo said inflation would range between 4 and 6 percent this year. “We see until now [inflation] is still within our target,” he said.
Helmi said Danamon revised down its inflation forecast from 5.7 percent to 5.3 percent, assuming there would be a 10 percent hike in electricity base tariffs rather than the 25-30 percent initially expected.
“Yet the risk to our latest forecast is still to the downside,” he said, explaining the forecast included plans to raise the price of subsidized fuels this year. Otherwise inflation might stay below 5 percent, he said.
Citi analyst Johanna Chua said, “We think BI’s tone will remain neutral to dovish this Thursday ... We don’t expect BI to hike rates until the first quarter of 2011,” She said, citing global factors
including the impacts of the eurozone debt crisis.
Agus said BI might raise its rate in the last quarter but more likely early in 2011. The Finance Ministry assumed in the state budget of 2010 and 2011 the rate on three-month BI bills would average 6.5 percent.
“We’re not too optimistic rates on average would decline,” he said.
The Finance Ministry assumed inflation would reach 5.3 percent in 2011.
