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March Inflation Limits Bank Indonesia’s Room to Cut Interest Rates

From The Jakarta Globe
April 1, 2015

Inflation increased slightly in March, data from the Central Statistics Agency, or BPS, showed on Wednesday, as prices were pushed up by higher prices for fuel and rice and continued weakening of the rupiah.

Analysts said stronger inflation would limit Indonesia’s central bank’s ability to further reduce its key interest rate. The BPS announced March’s headline inflation rate was 6.38 percent, compared with 6.29 percent a month earlier.

“This is broadly in line with our forecast and the consensus median,” said Dian Ayu Yustina, a Jakarta-based economist with Bank Danamon Indonesia.

The administration of President Joko Widodo has reformed the fuel price policy to a regulated price that can fluctuate according to the global oil price and the exchange rate.
Looking forward to the rest of the year, analysts Wai Ho Leong and Angela Hsieh from Barclays said the path of inflation was still benign.

They projected inflation to average 6.5 percent in the first quarter of 2015, roll down to 6.3 percent in the second and hit 5.6 percent in the third quarter, before falling further to the central bank’s target range of 3 to 5 percent from November.

Taking into account low inflationary pressures, the central bank trimmed its key interest rate, the BI rate, by 25 basis points in February to 7.50 percent.
It kept the rate steady in March, which analysts said was necessary to keep the rate attractive amid the falling rupiah.


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