Indonesian November Inflation Slows Unexpectedly

Domestic inflation unexpectedly slowed in November, led by a decline in prices of unprocessed foods and transportation-related products, giving the central bank more time before it would need to start raising interest rates, analysts said.

Consumer prices grew at an annual rate of 2.41 percent in November, the Central Statistics Agency (BPS) said on Tuesday. Year-on-year inflation in October was 2.57 percent. Meanwhile, January-to-November inflation came in at 2.45 percent.

Singapore-based Citigroup economist Johanna Chua said the November inflation rate “surprised on the downside.”

“The decline in prices of unprocessed foods and 0.14-percent deflation in the transportation sub-component likely reflected the impact of a stronger rupiah, offsetting the modest liquefied petroleum gas price increase of Rp 100 and the increase in non-subsidized fuel prices starting on Nov. 1,” she said.

However, James Lord, an economist at Capital Economics in London, said inflation was “bottoming out and will likely rise sharply in the coming months.”

“We expect rates to stay on hold this week, but a first hike is close,” he said.

Bank Indonesia has held the benchmark rate at 6.5 percent for the past three months. It will announce its latest policy decision on Thursday.

The central bank expects inflation to accelerate next year to 4 percent to 6 percent. Its forecast for this year is 3.6 percent to 3.7 percent, Senior Deputy Governor Darmin Nasution said last week.

“We expect Bank Indonesia to begin its monetary tightening cycle in the first quarter of 2010,” Goldman Sachs economists Pranjul Bhandari and Shirla Sum said in a report last week. The central bank is forecast to raise its policy rate by 100 basis points next year, according to the report.

JG, Bloomberg

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