Will Bank Indonesia’s Benchmark Rate Jump With Food Price Inflation?

Jakarta Globe & Reuters

Inflation unexpectedly accelerated in June as food costs climbed, but most analysts say the rises in consumer prices are unlikely to prompt Bank Indonesia to lift its benchmark rate when the central bank meets next week.

The consumer price index, which measures the average price of a selection of consumer goods and services, increased 4.53 percent in June, slightly higher than the 4.33 percent median forecast of economists surveyed by the Jakarta Globe last week.

Inflation rose 4.45 percent in May, the Central Statistics Agency (BPS) said in Jakarta on Monday.

Bank Indonesia has kept its benchmark rate unchanged since the last cut in February this year, when the central bank opted to spur economic growth amidst the euro debt crisis.

Lingering concerns over the euro crisis, coupled with the global economic slowdown, has prompted foreign investors to pull their funds from emerging markets, including Indonesia. This has weakened the rupiah in recent months.

The rupiah was at 9,401 at the end of trading in Jakarta on Monday, stronger than the 9,480 it closed at on Friday.

Economists said that going forward inflation may accelerate further as Indonesia, the country with the largest Muslim population in the world, starts observing the fasting month, which will last from the third week of July until the third week of August.

Typically, Indonesians increase spending on clothes and food during the month, causing inflation to accelerate.

“With the Muslim fasting month approaching, we may see a trend of rising demand increasing inflation, especially on food and clothing, in the months ahead,” Anton Gunawan, an economist at Bank Danamon Indonesia, said in a report on Monday.

“This may be in line with the increasing growth of the money supply, which could push core inflation higher, though it will remain benign at the end of year,” Anton noted in the report to clients in Jakarta.

Hartadi A. Sarwono, a deputy governor at Bank Indonesia, hinted last week at the possible increase in inflation in the coming months.

Juniman, an economist at Bank Internasional Indonesia, said there was a predicted shortage of basic foods before the Muslim fasting month.

“The price increase is due to the depletion of the supply and seasonal factors ahead of Ramadan,” Bloomberg quoted Juniman saying.

Bank Indonesia, which is due to hold its monetary policy meeting on July 12, has kept its policy rate at 5.75 percent for the last five months.

It has been intervening in the foreign exchange market in recent weeks to help stabilize the rupiah.

Indonesia’s exports tumbled 8.55 percent this May from a year ago, a second straight decline after a 3.46 percent drop in April, the country’s statistics bureau said on Monday.

The country’s total exports, including oil and non-oil and gas, were valued at $16.72 billion last month, according to data from the statistics office.

Despite the rising inflation reading in June, inflation is still within the target range set by Bank Indonesia. The central bank has forecast inflation in the range of 3.5 percent to 5.5 percent this year.