JAKARTA, Apr 1: Indonesia’s annual inflation rate accelerated slightly in March, a development that limits the central bank’s room to cut interest rates again. The statistics bureau said on Wednesday that March’s headline rate was 6.38 percent, compared with 6.29 percent a month earlier. The main reason for the increase was higher fuel prices.
A Reuters poll expected a March rate of 6.40 percent. Bank Indonesia expects the annual inflation rate to stay around 6.3 percent until November, then drop to about 4 percent due to changes in the base for comparison. Last November, President Joko Widodo raised fuel prices by more than 30 percent, which caused the annual inflation rate to spike to 8.36 percent in December. One day after he hiked prices, BI raised its key interest rate by 25 basis points to 7.75 percent.
Widodo managed to get rid of gasoline subsidies in January and also cut domestic pump prices, thanks to the massive drop in global oil prices.
In February, with inflation dropping, BI surprised the market by reversing its November hike, cutting the benchmark rate to 7.50 percent.
Some economists believe BI will cut rates again this year to help support economic growth, which in 2014 fell to 5.02 percent, the slowest pace in five years. But constraining BI’s ability to cut is the need to help the fragile rupiah and contain Indonesia’s current account deficit, which at times has been more than 3 percent of gross domestic product.
EYES ON THE FED
The rupiah has weakened about 5 percent against the dollar this year and is expected to come under fresh pressure whenever the Federal Reserve begins raising U.S. interest rates.
The central bank has said inflation and the current account deficit are the main indicators it looks at when deciding the policy rate.
Core inflation, which excludes administered prices and volatile food prices, accelerated to 5.04 percent in March from 4.96 percent the previous month. Transportation costs increased 0.77 percent from February, as fuel prices were higher. Joshua Pardede, economist at Bank Permata in Jakarta, said potentially the benchmark rate could remain 7.5 percent all year, but that depends on external factors. ‘If the Fed decides to postpone a rate hike to next year, there should be room to cut. But we think BI will hold if the rupiah is still volatile,’ he said. BI’s next policy meeting is April 14.
(AGENCIES)
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