Published: January 10 2011 10:07 | Last updated: January 10 2011 15:34
The statements are getting longer, but they’re making less and less sense. In the three full trading days since Bank Indonesia’s policy statement took 1,100 words to explain what it usually does in about 600, the Jakarta Composite Index has fallen almost 8 per cent, making it the world’s worst-performing major equity benchmark.
BI’s decision to keep its policy interest rate at 6.5 per cent for the 17th month in a row rests on two assumptions: that food price inflation won’t spill into core inflation, and that interest-rate increases would attract damaging short-term capital flows. Both are dubious. First, it is true that the core inflation rate (excluding food and energy) held steady in December at 4.3 per cent, while headline consumer price inflation – driven by food, which accounts for about a third of the CPI basket – continued to accelerate to 7 per cent, well outside the target zone of 4 to 6. But headline and core never decouple for long. Consumer surveys and rising 10-year bond yields suggest that inflation expectations are taking root. Second, rate rises need not attract inordinate amounts of hot money if capital controls are effective, and everyone else is tightening too.
Governor Darmin Nasution should realise that already-high food prices make the country particularly vulnerable to supply-side shocks such as the one threatening wheat exporters in Australia, for whom Indonesia is the biggest customer. Waiving taxes on rice or cooking oil is all very well, but the JCI’s biggest three-day fall for more than two years shows that investors doubt the authorities can curb rising prices through non-monetary tools alone. The central banks of Thailand and South Korea, where policy committees meet this week, should be taking note. Investors want higher real rates, and they want them now.
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