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.

Indonesia Economic Growth Q2 2008

Indonesia's economic growth unexpectedly accelerated in the second quarter as rising prices and demand for the nation's coal, palm oil and rubber pushed exports to a record. Southeast Asia's largest economy expanded 6.4 percent from a year earlier, after growing 6.3 percent in the previous three months, according to the latest data from the Central Statistics Bureau

Indonesia's exports reached an unprecedented $12.9 billion in June as rising shipments to India and China offset weaker demand from the U.S., Asia's biggest market. Stronger overseas sales may allow the central bank to raise interest rates from an 18-month high to tame inflation. Indonesia's benchmark index rose 1.2 percent on the news in Jakarta, while the rupiah was unchanged at 9,185 per dollar.

The central bank raised its benchmark rate for a fourth month on Aug. 5, to 9 percent. Consumer prices jumped 11.9 percent in July from a year earlier and bank loans increased 32 percent. Wholesale-price inflation accelerated to 34.7 percent in June, the fastest pace in nine years.


Exports grew 16.1 percent in the second quarter, the fastest pace in three years. India and China bought 15 percent of Indonesia's exports in May, compared with 13 percent for the whole of 2006, according to the July data. The U.S. accounted for 11 percent of the nation's exports in May.

In Indonesia, cheap credit till May and rising sales of coal, palm oil and rubber boosted rural incomes and spending, particularly in provinces in Sumatra and the Indonesian part of Borneo island, which produce most of the nation's palm oil. Sumatra and Borneo also produce the biggest share of the country's rubber, with Sulawesi producing most of its cocoa.



Car sales surged to a record 54,631 units in June.


Still, a decline in commodity prices since the end of June may reduce farmer incomes and damp consumption, which accounts for about 70 percent of the $365 billion economy. Consumption growth slowed to 5.3 percent in the second quarter from a year earlier, compared with a 5.5 percent gain in the previous three months, according to today's report. Government spending grew 2.2 percent after rising 3.6 percent in the first quarter.

Palm oil in Malaysia has declined 42 percent from its March 4 record. Coal prices at Australia's Newcastle port, a benchmark for Asia, fell 2.6 percent last week to $156.16 a ton, according to the globalCOAL NEWC Index.


The International Monetary Fund, in its annual assessment of Indomesia this week, “welcomed the resilience of the Indonesian economy to the global slowdown and financial market turmoil, underpinned by strong macroeconomic fundamentals and the highly liquid and well-capitalised banking system”. It forecast growth would reach 6.3 per cent next year.

Exports accounted for 30 per cent of growth in the second quarter, far lower than in neighbouring countries, while consumer spending represented 60.3 per cent. Quarter-on-quarter growth was 2.44 per cent, compared with 2.19 per cent in the first quarter. Indonesia’s business confidence index rose to 114.55, its highest level for four years, indicating a strongly positive outlook, the national statistics agency said. A figure of 100 is considered neutral. Consumer confidence, however, fell to 93.84, its lowest level in three years, on the back of a 30 per cent fuel price increase in May and rising inflation.

A fall in commodity prices over the past two months will slow growth, but this will be partly compensated for by increased government spending on infrastructure, especially power. The finance ministry said this week the government had spent only 36.7 per cent of its 2008 budget in the first half of the year.

The budget deficit is now expected to be about 1.9 per cent of GDP this year up from the originally intended 1.5 percent in order to fund an additional education budget. This week the constitutional court ruled that, in line with the constitution, education spending must be 20 per cent of the government’s budget, a figure it has never reached in the last decade.