On-year inflation in Indonesia hit a 22-month high in July as the second-round effects of the May fuel price increases were yet to fully materialize. The result, following high inflation in June, provides leeway for the central bank to raise its benchmark interest rate.
A higher Bank Indonesia (BI) rate would mean the interest rates of bank loans would also be adjusted upward. This could discourage lending for both consumers and companies and add a threat to economic activities as consumption has been the main driver of growth.
The Central Statistics Agency (BPS) reported Friday that inflation in July rose 11.9 percent from a year earlier, up from 11.03 percent in June. This is due mostly to the increasing prices of food and fuel.
From January to July, inflation accumulated to 8.85 percent, meaning the government may face difficulties in keeping full-year inflation below its 11.4 percent target.
The central bank is expected to raise its interest rate by 25 basis points to 9 percent in early August to cushion inflation expectations. BI had raised its interest rate by 25 basis points for three consecutive months from May. As long as BI maintains its key rate below 9.5 percent, experts believe the economy will still grow, while dampening inflation expectations.
Source: The Jakarta Post, August 2, On-year inflation hits 22-month high in July, http://www.thejakartapost.com/news/2008/08/02/onyear-inflation-hits-22mo...