Wednesday, September 3, 2008

Indonesia Raises Interest Rates

Indonesia’s central bank raised its key interest rate today -  by 25 basis points to 9.25 per cent. This was the fifth increase since January, and may well now be the last this year as inflation has probably peaked. 

The 25 basis point hike - which was widely anticipated by analysts - did not have a significant impact on financial markets. The rupiah held steady at 9,200 per dollar, while stocks remained in negative territory. The bond market also largely shrugged off the rate hike.

August consumer prices rose 11.85 per cent over a year earlier, just very slightly down from July’s annual pace of 11.9 per cent, which was the highest level in almost two years. However, this was the first fall in annual inflation in seven months, and gave credence to the view that inflationary pressures, led by the soaring cost of raw materials and food, may now have peaked.

In his statement central bank governor Boediono said on Saturday that Indonesia could afford to tackle inflation using monetary tightening without having to worry about the impact on economic growth, and indicated he was ready to do ”whatever it takes” to bring annual inflation below 10 per cent in 2009. On Tuesday, Boediono told parliament annual inflation may fall below 6.5 per cent at the end of 2009, which compares with the authority’s official forecast of 6.5 per cent to 7.5 per cent.

Indonesia’s central bank, like other central banks in Asia, is trying to contain inflation, largely stoked by a surge in oil and commodity prices, without hurting economic growth at a time when the global economy is cooling. Indonesia's economy  grew in the second quarter by a stronger-than-expected 6.39 per cent from a year earlier, thanks to strong commodity exports and investment. The growth rate  in the first quarter was 6.32 per cent, while Indonesia’s 6.3 per cent GDP growth in 2007 was the fastest pace in more than a decade. Thus growth priorities can realistically be put temporarily on the back burner while inflation is brought under control.