Indonesia’s central bank paused on Thursday after a series of rate cuts, and hinted at a shift in its policy stance on expectations that inflation will accelerate above its target in coming months due to a planned increase in fuel prices.
The benchmark overnight rate was kept at a record low 5.75 per cent, after a surprise 25 basis points cut in February, as Bank Indonesia (BI) sees the inflationary impact from a fuel hike as temporary and still aims to support strong growth in Southeast Asia’s biggest economy.
However the policy statement contrasted with BI’s previous focus on boosting the domestic economy when it saw headwinds from a slower global economy and easing local inflation.
The rupiah edged lower after the decision to trade down 0.3 lower against the dollar on the day, as market players reacted to conflicting signals from BI and the government by cutting their exposure. Some economists fear the fuel price move could cause inflation to run out of control and force BI into a policy U-turn, though others see BI now sitting on its hands through 2012.
“We expect Bank Indonesia to stay on hold for the rest of the year, given heightened inflation risks. Bias is towards a possible tightening in the second half, if inflation overshoots,” said Chua Hak Bin, economist at Bank of America Merrill Lynch in Singapore.
“In such a scenario, we expect BI to tighten via liquidity measures such as raising reserve requirements, narrowing the rate corridor, rather than via policy rate hikes as the first course of action,” he added.
All 14 economists polled by Reuters before the rate decision had expected no change. Three out of 10 economists expected BI to raise its policy rate to as much as 6.25 per cent by the end of this year to tame inflation, while four forecast a rate hold.
Inflation surprisingly slowed further in February to a 22-month low of 3.56 per cent, but the government expected price pressures to intensify in the second quarter as it planned to hike subsidised fuel price by at least a third to ease the pressure on state coffers.
Indonesia’s finance ministry raised its 2012 inflation forecast to 7 per cent in the proposed budget revision submitted to parliament on Wednesday, from 5.3 per cent.