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Tue, Jun 03, 2008 - Page 10 News List

Indonesian inflation hit 20-month high last month

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Indonesia's inflation accelerated to a 20-month high last month, heightening expectations the central bank will need to raise interest rates before an increase in fuel costs further spurs price gains.

Consumer prices rose 10.4 percent from a year ago, after increasing 9 percent in April, the Central Statistics Bureau said in Jakarta yesterday. Economists expected a 9.9 percent gain.

Bank Indonesia may raise its policy rate this week as it anticipates a jump in prices from transporting food and supplies across the world’s largest archipelago, following last month’s 29 percent average increase in energy costs.

“Bank Indonesia won’t just rely on interest-rate policy to control inflation,” said Destry Damayanti, an economist at PT Mandiri Sekuritas in Jakarta. “It will also try to maintain exchange rate stability and absorb money supply.”

The rupiah has fallen 5.2 percent in the past 12 months, making it the second-worst performing among Asia’s 10 largest economies.

The Indonesian currency is “modestly” undervalued and gains may help the central bank slow inflation, said Milan Zavadjil, assistant director of the IMF’s Asia-Pacific department.

Bank Indonesia may raise its policy rate by half a percentage point after the surge in prices, Robert Prior-Wandesforde, a senior economist at HSBC Holdings Plc in Singapore, said in a note to clients.

“One consequence of the likely rapid rate hikes will be to squeeze 2009 growth which is likely to be well below Bank Indonesia’s 6.3 percent forecast,” he said.

The IMF also expects Indonesia’s central bank to keep raising borrowing costs.

Bank Indonesia lifted its key rate by a quarter of a percentage point from 8 percent on May 6, the first increase since December 2005. Bank policymakers meet on Thursday.

The central bank forecasts inflation to accelerate to between 11.5 percent and 12.5 percent by year-end, Governor Boediono told lawmakers yesterday.

RUSSIA HEATS UP

Meanwhile, Russian inflation may accelerate to 14 percent this year and the risk of the economy overheating is mounting, an IMF official said yesterday.

“The risk is that inflation gradually increases to such a level that it requires a sharp tightening of monetary policy that could cause a slowdown in growth,” Poul Thomsen, head of the IMF mission in Russia, told reporters in Moscow.

The risk of the economy “overheating” is increasing, he said.

The economy of the world’s largest energy exporter grew 8.1 percent last year, stoking inflation that accelerated to an annual 11.9 percent, more than three percentage points higher than the government’s target.

The economy may expand 7.8 percent this year as oil prices remain high, further threatening inflation, Thomsen said.

“If demand grows by 15 percent in real terms in an economy with potential growth of around 7 percent, you are rapidly using up what spare capacity is available out there and you will see growth of inflationary pressures,” he said.

The IMF doesn’t expect any “serious impact” on Russia from global financial-market turmoil, Thomsen said.

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