Bank Indonesia recognizes inflation risk, Indo GDP - CLSA Indo

(1) Indonesia Policy, BI recognizes inflation risk
Tony Nafte sees the increase in policy rate by 25bps to 6.75% as long overdue as BI recognized building inflation expectations.

Tony expects a further hike of 150bps to lift policy rate to 7.75% by end-2011, and to 8.25% by 1Q2012. IDR is also expected to appreciate by 10% to IDR 8,190/USD by end 2011.

Key points:
Consumer price expectation has been rising ahead of actual inflation
Sustained large capital inflows will lead to easy monetary conditions; requiring exchange rate adjustments
BI intends to 'strengthen the rupiah exchange rate policy in line with measures to curb future inflationary pressures'

(2) Indonesia GDP, Topping 6% for 2010 and 2011.
Real GDP growth for 4Q10 surged to 6.9% YoY from 5.8% in 3Q10, lifting 2010's GDP growth to 6.1%. Tony Nafte sees firming domestic demand and the raised GDP platform as strong positives, and lifts his 2011 real GDP forecast above 6%, from 5.7% previously.

Key points:
Full year GDP growth of 6.1%, 4Q10 surged 6.9% YoY
Sharp growth acceleration in 4Q10 led by investment and exports
While private consumption slowed (4.4% YoY in 4Q10, from 5.2% in 3Q10), we remain positive as export surge in late 2010 can be expected to boost rural income, a key driver of consumption growth