Indonesia's March inflation at Two Year High on Food Prices Hike

KONTAN.CO.ID -  JAKARTA, April 1 (Reuters) - Indonesia's consumer price index rose to a two-year high in March, official data showed on Friday, as economists warned inflation would creep up further as the government raised a gasoline price and the value-added tax rate.

Annual inflation rose to 2.64% last month, the highest since April 2020 and faster than the 2.56% forecast in a Reuters poll, on rising prices of chilli, cooking oil, eggs, household fuel and gold jewellery.

The core inflation rate, which strips out volatile food and government-controlled prices, also rose to 2.37%, a touch higher than the 2.33% expected in the poll.

The central bank has a target to keep headline inflation within a range of 2% to 4%.

However, Bank Indonesia's (BI) Governor Perry Warjiyo has in recent months vowed to keep interest rates at their record low until BI sees signs of a fundamental price rise, which it gauges with core inflation.

Baca Juga: Vladimir Putin Targets Enemies at Home as His Missiles Strike Ukraine

Separately on Friday, state energy firm Pertamina raised the price of its 92-octane gasoline by nearly 40% to cut losses amid a surge in global oil prices due to the Russia-Ukraine war.

Although the fuel is less popular than the subsidised 90-octane gasoline, economists say the move will add inflationary pressure just ahead of the fasting month of Ramadan, when inflation typically peaks in the Muslim-majority country.

The government also raised value-added tax by one percentage point (pp) to 11% on Friday, a measure that Finance Minister Sri Mulyani Indrawati has said would add less than 0.5 pp to headline inflation.

Wisnu Wardana, an economist with Bank Danamon, said the gasoline price hike would add another 0.49 pp to headline inflation.

Baca Juga: Indonesia Revokes Forest Concession Permits Covering Over 400,000 Hectares

"We reiterate our view that inflation will gradually approach the upper bound of the central bank's target, followed by a calibration of monetary policy in 3Q22," he said, predicting BI may take more liquidity out of the market through open market operations or start to hike its policy rates.

Akbar Suwardi, a banker with one of Indonesia's biggest lenders, said despite the expected spike in inflation, BI should be wary of raising interest rates too soon.

"If interest rates rise and demand falls while inflation remains high because there is an unresolved supply-side problem, we could be facing stagflation," he said, referring to an economic condition when growth is slow, while prices keep rising.

The median forecast of economists in a Reuters poll last month was for BI to hike rates in the third quarter. BI's next policy meeting is on April 18 to 19.