Inflation Puts Pressure on Indonesian Rates

Rising food prices drove Indonesia’s annual inflation past seven percent in January, officials said Tuesday, beating expectations and piling pressure on the central bank to tighten interest rates.

Analysts said Bank Indonesia would have to increase its benchmark rate this quarter after the consumer price index rose 7.02 percent in January, more than the market expectation of 6.81 percent.

The monthly inflation rate for January reached 0.89 percent, compared to expectations of 0.63 percent. “The high inflation rate means food prices are still high. This pressures the central bank to raise its rate soon,” Standard Chartered economist Fauzi Ichsan said.

Extreme weather has disrupted harvests and food distribution, pushing last year’s annual inflation close to seven percent, above the official target of 4.0-6.0 percent. Prices of chillies, a staple in Indonesia, increased five-fold to around 100,000 rupiahs ($11) a kilogram (2.2 pounds) late last year.

“The government actually has done its best to fight food prices, such as by suspending import duties for food items, but they won’t have any impact for two or three months,” Ichsan said.

The government last month suspended import duties on wheat, soybeans, fertiliser and other food-related items for the rest of the year. Ciptadana Securities analyst Syaiful Adrian said the central bank was “behind the curve” and foreign investors who snapped up Indonesian stocks and bonds last year were getting nervous.

“The central bank’s key rate is very sensitive to the market. More foreign funds will leave the country if Bank Indonesia fails to hike its rate soon,” he said.

Bank Indonesia has resisted calls to hike the benchmark rate from 6.50 percent, where it has sat for more than 17 months.