Lowest inflation in five years eases monetary pressure
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Indonesia’s monthly inflation slowed down in September, repeating the same trend last year, as consumer prices began to moderate following a peak during Ramadhan the previous month, the Central Statistics Agency (BPS) has reported.
Consumer prices rose by 0.01 percent in September, considerably lower than the 0.9 percent in August, furthering an easing of pressure on the monetary authority to tighten the money supply.
The BPS reported that the inflation rate during the first nine months of this year reached 3.49 percent. Based on a year-on-year comparison, however, consumer prices were 4.31 percent higher compared to a year before in September, down from 4.58 percent in August.
Standard Chartered economist Eric Sugandi said that with the current inflationary trend, the country would be able to meet Bank Indonesia’s inflation target this year, which stands at 4.5 percent with a margin of error of 1 percent.
Eric said the central bank was likely to maintain its benchmark interest rate until the end of the year. The rate has been maintained at 5.75 percent for the past seven consecutive months.
“Bank Indonesia [BI] has no reason to raise its benchmark interest rate because inflation has been manageable and has been relatively low, as the government is highly unlikely to raise subsidized fuel prices before the end of this year,” Eric said.
“On the other hand, BI will not decrease its benchmark interest rate as that could put more pressure on the rupiah,” he added.
Eric said that BI might prefer to utilize its deposit facilities (Fasbi) rate to manage inflation and ease potential pressure on the current account.
“We believe Bank Indonesia might increase its Fasbi rate by at least 25 basis points in October or November,” he said.
BI raised the Fasbi rate in August by 25 basis points to 4 percent, in a bid to attract more foreign funds and help maintain the local currency, amid pressure from a deficit in the country’s balance of payment.
The central bank has also allowed overseas investors to hedge foreign exchange transactions to one week at minimum, down from the previous three-month limit, which is aimed at providing flexibility and lower risks for investors.
The current-account deficit, which stood at US$3.2 billion in the first quarter and $6.9 billion in the second quarter, was partly stemmed by a surge in imports, particularly raw materials, intermediary goods and capital goods, amid slowing exports caused by weaker overseas demand for local primary commodities as well as manufactured goods.
The Organization for Economic Cooperation and Development (OECD) said last week that Indonesia should tighten its monetary policies to control inflation amid robust domestic consumption.
The forum of predominantly European economies expects Indonesia’s gross domestic product (GDP) to grow by 6.2 percent next year, higher than the 6 percent estimated for this year. It predicts that faster growth will result in 4.7 percent inflation next year, up from 4.2 percent predicted by the end of this year.
— JP/Hans David Tampubolon