| BI hold Rate 6.5% | ||
Announced: Bank Indonesia Policy Rate Decision
Actual: 6.5%; Previous: 6.5%
Consensus: 6.5%; BofAML: 6.5%
Bottom Line
Actual: 6.5%; Previous: 6.5%
Consensus: 6.5%; BofAML: 6.5%
Bottom Line
Bank Indonesia kept the policy rate on hold at 6.5%. BI forecasts inflation at 4% - 6% in 2011 and 3.5% - 5.5% in 2012. GDP growth is expected to come in at about +6.3% in 2011.
Why it Matters
Bank Indonesia attributes the high inflation reading to largely volatile food prices. Bank Indonesia will coordinate with the government to curb inflationary pressures, highlighting that inflation can be curbed with better production and distribution.
Inflation surged to +7.0% in December, surprising on the upside, and is now uncomfortably above the 4-6% inflation target. Higher food (+15.6%), processed food (+7%) and clothing (+6.5%) prices were main drivers. Transport prices (+2.7%) remain benign, but will see a big jump in April when private cars will not be allowed to buy subsidized gasoline in Greater Jakarta. Core CPI however remains manageable, at +4.3%.
Foreign reserves increased strongly to US$96.2bn at end-Dec from US$92.8bn at end-Nov. For 2010, foreign reserves increased a staggering +US$30.1bn from US$66.1bn at end-2009. Bank lending growth was +22.8% in 2010, reaching the targeted 22 - 24% range. Banks are now required to disclose their prime lending rates to promote transparency.
Bank Indonesia recently introduced prudential measures to manage inflows and reduce its vulnerability to sudden reversals. Minimum foreign currency reserve requirements for banks will be raised to 5% (from 1%) in March and to 8% in June. A 30% cap on lenders' short-term overseas borrowing was also reintroduced to reduce vulnerability to sudden reversals.
Key Points
We maintain our call that Bank Indonesia will likely initiate its policy rate hike from February, as inflation is now uncomfortably above its target. There are signs that inflation pressures may broaden beyond food, given rising global oil prices, wage pressures (minimum wages raised by +15.4% from Jan), money supply growth (M1 +15.5% in Nov), and fuel subsidy cuts for Greater Jakarta in April. We are looking for a cumulative +100bps policy rate hike for 2011.
Why it Matters
Bank Indonesia attributes the high inflation reading to largely volatile food prices. Bank Indonesia will coordinate with the government to curb inflationary pressures, highlighting that inflation can be curbed with better production and distribution.
Inflation surged to +7.0% in December, surprising on the upside, and is now uncomfortably above the 4-6% inflation target. Higher food (+15.6%), processed food (+7%) and clothing (+6.5%) prices were main drivers. Transport prices (+2.7%) remain benign, but will see a big jump in April when private cars will not be allowed to buy subsidized gasoline in Greater Jakarta. Core CPI however remains manageable, at +4.3%.
Foreign reserves increased strongly to US$96.2bn at end-Dec from US$92.8bn at end-Nov. For 2010, foreign reserves increased a staggering +US$30.1bn from US$66.1bn at end-2009. Bank lending growth was +22.8% in 2010, reaching the targeted 22 - 24% range. Banks are now required to disclose their prime lending rates to promote transparency.
Bank Indonesia recently introduced prudential measures to manage inflows and reduce its vulnerability to sudden reversals. Minimum foreign currency reserve requirements for banks will be raised to 5% (from 1%) in March and to 8% in June. A 30% cap on lenders' short-term overseas borrowing was also reintroduced to reduce vulnerability to sudden reversals.
Key Points
We maintain our call that Bank Indonesia will likely initiate its policy rate hike from February, as inflation is now uncomfortably above its target. There are signs that inflation pressures may broaden beyond food, given rising global oil prices, wage pressures (minimum wages raised by +15.4% from Jan), money supply growth (M1 +15.5% in Nov), and fuel subsidy cuts for Greater Jakarta in April. We are looking for a cumulative +100bps policy rate hike for 2011.
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