Indonesia Decision Guide: Watch for Rice Hikes, Not Rate Cut

(Bloomberg) -- Indonesia’s central bank has something else to fret about at its first meeting of the year: runaway rice prices.

After an aggressive bout of easing that’s seen eight interest rate cuts over the past two years, Southeast Asia’s biggest economy is still struggling to fire. A recent pick up in food inflation means there’s limited room for further easing, but at the same time, Governor Agus Martowardojo and his board are in no rush to follow global peers in raising rates on Thursday.

With the statistics office this week warning of a “worrying” surge in the price of rice -- a staple food in almost every Indonesian meal -- lawmakers and Bank Indonesia have shifted focus to lowering food costs. The government last week said it would import 500,000 tons of rice to overcome a supply shortage.

“We were given a warning in the previous months that the rice price had started to increase,” Finance Minister Sri Mulyani Indrawati said Monday. “The government has decided to make rice price stabilization one of its focuses in the coming months.”

All 24 economists surveyed by Bloomberg expect Bank Indonesia to keep the benchmark interest rate unchanged at 4.25 percent on Thursday.

Here are some key points to watch in the statement:

Price Pressures

Consumer prices gained 3.6 percent in December from a year earlier, driven by higher food costs, after posting the slowest gain for 2017 in November. Rice prices rose 6.1 percent in the past two months, according to Bank Indonesia.

Economists surveyed by Bloomberg predict inflation will average 3.8 percent this year. That’s still within the central bank’s narrower inflation target band for this year of 2.5 percent to 4.5 percent.

The inflation backdrop is “turning less benign,” said Euben Paracuelles, a senior economist for Southeast Asia at Nomura Holdings Inc. in Singapore, who expects Bank Indonesia to be on hold through 2018. “With the domestic economy showing some signs of further improvement and external risks still elevated, we believe BI is unlikely to resume policy rate cuts,” he said.

Growing Confidence

While consumer confidence hit a record high in December, Indonesians still aren’t spending. With buying by consumers and firms making up half of gross domestic product, lackluster sales continue to be a concern for the government and policy makers. Retail sales grew just 2.6 percent in December compared to a year earlier.

Bank Indonesia Assistant Governor Dody Budi Waluyo said consumption should recover this year at a “limited pace,” as the purchasing power of low and middle-income earners improved. “However, consumption is predicted to still be on hold among high-income people,” as they were spending more selectively, he told Bloomberg last week.

Josua Pardede, an economist at PT Bank Permata in Jakarta, said that more fiscal stimulus was needed in order to spur Indonesia’s economy.

“Private consumption is still sluggish. While consumers are more confident, they’re still not spending,” he said. “We forecast Bank Indonesia to keep interest rates unchanged for the whole year.”

Fed Policy

With the Federal Reserve having penciled in three rate hikes in 2018 following three last year, there could be pressure on emerging-market currencies such as the rupiah. Bank Indonesia’s Martowardojo has continued to cite higher U.S. interest rates as a key risk for Indonesia.

Policy makers have already signaled they stand ready to act against potential volatility in the currency. The rupiah has strengthened 1.6 percent against the dollar this year after being one of Asia’s worst performers in 2017. It gained less than 0.1 percent to 13,356 against the dollar as of 2:25 p.m. in Jakarta on Thursday.

The central bank forecasts the economy expanded 5.05 percent in 2017, and that growth will pick up to between 5.1 percent and 5.5 percent this year.

--With assistance from Manish Modi

To contact the reporters on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net, Tassia Sipahutar in Jakarta at ssipahutar@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke

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