Inflation in Indonesia, Southeast Asia’s biggest economy, rose to its highest level in 15 months in July, fueled by rising food prices and an electricity rate hike, with analysts saying the central bank will be under growing pressure to raise its key interest rate.
The Central Statistics Agency (BPS) on Monday said the consumer price index rose 6.22 percent in July from a year earlier, and was up 1.57 percent from the 5.05 percent increase in June.
Monday’s figure was higher than expected. Five analysts had forecast July’s year-on-year inflation to be between 5 percent and 5.89 percent.
There are now concerns inflation for August may increase even further, with the full impact of the electricity rate hike being felt in addition to the extra costs for the new school year and a rise in food prices to accompany the fasting month of Ramadan, which is expected to begin around Aug. 11.
“In July, food prices rose much more than expected,” said Helmi Arman, an economist at Bank Danamon. “The increase in the price of rice was even higher than in June, and the surge in the price of other foodstuffs, such as chilies and onions, continued.”
“The impact of the recent electricity rate hike was apparently not yet accounted for in July’s inflation figure,” he added.
Gundy Cahyadi, an analyst at OCBC Bank, said the rise in electricity rates could have further ramifications and its effects could linger, with some industries reportedly facing a 30 percent to 40 percent increase in power costs.
Rusman Heriawan, chairman of the BPS, warned that the government needed to work harder to rein in inflation to keep it at the targeted 5.3 percent for the year. Cumulative inflation for the first seven months has already reached 4.02 percent.
“I don’t think it [the target] can be met,” Rusman said, predicting inflation for 2010 would fall between 5.3 percent and 6 percent.
Bank Indonesia is one of only a few central banks across the region to have so far resisted raising its key interest rate.
It currently stands at 6.5 percent and has been steady since August 2009. Bank Indonesia has preferred to focus on fostering growth rather than responding to rising inflation.
Enrico Tanuwidjaja, a regional economist at OSK-DMG Group in Singapore, said Bank Indonesia was unlikely to respond at this week’s policy meeting with immediate measures to rein in inflation.
However, the upcoming meeting could be “quite crucial in determining the turning point of their inflation-growth outlook and, correspondingly, their rate stance,” he said.
Both Helmi and Enrico predicted the central bank would raise interest rates sometime around October.
