Indonesia screws fuel price hike

An adjustment in BI's interest rate might not be necessary with a projected inflation of 5% yoy.

According to Nomura, IMF indicated that Indonesia’s current FX reserves are adequate but it is important for the central bank to maintain the Rupiah flexibility. Added that there is now little need for the BI to adjust its interest rate, as inflation is now projected at 5% yoy by end-2012, while GDP growth is likely to come in at 6.1% yoy.

Here's more from Nomura:

At this juncture, we don’t see signs that inflation would spike anytime soon, especially considering that there has been a clear downward trend seen in the region.

The underlying inflationary pressures will sustain and keep inflation supported ahead, however, especially with the Rupiah weakness possibly offsetting some of the recent moderation seen in global commodity prices. We expect 2012 average inflation at circa the 5.5% level, given that a fuel price hike is now unlikely to be implemented.

This will support the BI’s decision to keep its interest rate unchanged at 5.75% for the rest of the year, even if some adjustment to the FASBI rate still remains on the cards.