Indonesia August inflation cools, but rate cut unlikely

(Reuters) – Indonesia‘s inflation rate cooled in August in a rare bit of welcome news for the central bank, but economists say policy uncertainty in China and the United States is likely to keep policymakers from cutting interest rates any time soon.

Annual inflation eased to 7.18 percent in August from 7.26 percent in July, data from the statistics bureau showed on Tuesday. A Reuters poll had predicted inflation would pick up to 7.43 percent.

"This is a positive development for the central bank, but this won’t change the level of BI’s benchmark rate. Its focus remain on external issues like yuan devaluation, Fed rate hike, and falling commodity prices," said Aldian Taloputra, an economist with Mandiri Sekuritas in Jakarta.

Bank Indonesia (BI) has said the inflation rate reached its peak in July and would start to decelerate. It sees inflation easing further to around 4 percent in November when a fuel price hike in 2014 affects base comparisons.

But the central bank has signalled there will be no more monetary easing until global financial uncertainty eases.

BI said the current focus of monetary policy was supporting the fragile rupiah, emerging Asia‘s second-worst performing currency, which has slumped to 17-year lows.

The rupiah has weakened more than 12 percent against the dollar this year, which Taloputra said was the main cause core inflation rose to 4.92 percent year-on-year in August from 4.86 percent in July.

BI has also said it would be difficult to raise its benchmark rate to attract portfolio inflows due to concerns over economic growth, which hit a six-year low in the second quarter.

However, ING Financial Markets said ahead of the inflation data that BI could cut the key policy rate – held at 7.50 percent since February – by 25 basis points when inflation actually cools to BI’s target range of 3-5 percent.

"Until then, growth will remain under pressure from tight monetary conditions," ING said in its research note. (JAKARTA, Sept 1,2015)

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