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Indonesia’s inflation picks up, fuel price still a concern

Police spray water cannons at student protesters during a demonstration against the government's plans to raise fuel prices, in Jakarta March 29, 2012. — Reuters picPolice spray water cannons at student protesters during a demonstration against the government's plans to raise fuel prices, in Jakarta March 29, 2012. — Reuters picJAKARTA, April 2 — Indonesia’s inflation picked up in March to 3.97 per cent from a year earlier, though the scrapping of plans to lift fuel prices right away should let the central bank hold rates and keep focusing on supporting growth in Southeast Asia’s biggest economy.

March annual inflation of 3.97 per cent was below the 4.02 per cent expected in a Reuters poll but higher than February’s 3.56 per cent.

Bank Indonesia (BI) is now widely expected to leave its benchmark policy rate on hold at a record low when it meets on April 12 as it seeks to prop up growth.

BI’s policy rate “will stay until year-end,” predicted Eric A. Sugandi, economist at Standard Chartered in Jakarta. “BI may use other instruments such as raising reserve requirements from 10.5 per cent to 12.5 per cent to tame inflation.”

Also today, Indonesia’s statistics bureau reported the country’s export growth in February at a three-month high of 8.54 per cent, versus a forecast of 7.15 per cent, due to higher global commodity prices and better external demand. Policymakers expect low growth this year after exports surged in 2012.

Earlier this year, the central bank had forecast inflation could reach seven per cent with a fuel price hike. The government has revised up its 2012 inflation target to 6.8 per cent in the state budget from 5.3 per cent.

BI left rates on hold in March after a surprise cut in February to a record low of 5.75 per cent as its emphasis has shifted towards inflation from supporting growth, on concerns over a fuel price hike expected in April.

However, Indonesia’s parliament on Saturday rejected a government proposal to raise fuel prices 33 per cent. But it gave the government authority to increase them if a measure called the Indonesian Crude Price (ICP) rises at least 15 per cent on average over six months from the current forecast of US$105 (RM315) per barrel.

Most analysts still expect fuel prices to be raised this year as global oil prices remain high. The current Indonesian price of subsidised fuels at 4,500 rupiah (RM1.50) a litre is less than half of the non-subsidised ones.

“We think that the possible earliest time to raise the fuel price, if the world oil price continues hovering at the current level, is in July 2012. That’s of course provided that President Susilo Bambang Yudhoyono has the courage to do it, considering massive labor and student demonstrations,” Bank Danamon economists Dian Ayu Yustina and Anton Gunawan said in a report published today.

Some economists think inflation will rise, whenever fuel prices get increased.

Prakriti Sofat of Barclays Capitals in Singapore said inflation in Indonesian “has bottomed out and is going to start ticking higher from March onwards.”

Indonesia’s government has revised the 2012 budget deficit target to 2.2 per cent of the gross domestic product from a previous 1.5 per cent target because of higher oil prices. This will likely pressure bond prices and the rupiah currency as the government needs to issue more debt.

The rupiah, the worst performer among major emerging Asian currencies this year, weakened 0.3 per cent to 9,165 per dollar today. The currency has weakened 1.15 per cent against the dollar this year, according to Reuters data.

Investors have refrained from buying Indonesian government bonds in recent weeks on worries over the planned fuel price hike. Foreign holdings fell to 29.6 per cent of the total outstanding bonds as of March 27, from 32.1 per cent at the end of January, latest government data shows.

The benchmark 10-year yield has risen 44 basis points to 6 per cent in March, before declining slightly to 5.86 per cent today.

“Some foreign bond investors will continue to go out. Thus we have to watch out for the possible sharp increase in the bond yield in the next few months, although BI may still be in the market to support the bond market,” said the Danamon report. — Reuters

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