Economy We trimmed our interest rate forecasts for the near term. The annual GDP forecast has been lifted to 6.4% from 6.0% to reflect a stronger-than-expected 1H - DBS Vickers

Bank Indonesia left rates unchanged at 6.75% last Friday. As we have pointed out, inflation is likely to rise more gradually than forecasted, as the government is considering postponing the plan of limiting the use of subsidized subsidised fuels, and food prices are tending to stabilizeshould stabilise thanks to the arrival of rice harvest season. This will provide some leeway for BI to hike rates at a measured pace. We have trimmed our interest rate forecasts, lowering the 3-month rate target to 7.25% from 7.5% and revising the 6-month target to 7.5% from 7.75%. The longer-term forecast of 8.0% is accordingly pushed back to 1Q12 from 4Q11.

Nevertheless, there is no change to our view that inflation and interest rates are on a rising trajectory. Despite the stabilization stabilisation in headline CPI, the underlying core inflation and public inflation expectations are continuing to trend upward. During BI's post-meeting statement released last Friday, the central bank was vigilant against “the renewed increase in core inflation”, pledging to “keep a close watch on future inflation developments” and “respond with carefully timed and measured adjustments in the BI Rate”. Obviously, the central bank’s bias of tightening remains intact. BI has also formally expressed that the monetary measures to curb inflation will include “ensuring added headroom for the appreciation in the rupiah”.

Meanwhile, on the growth front, we have upgraded GDP growth forecast to 6.4% for this year from 6.0%. Domestic demand growth in the first half will likely perform better than what we initially expected, due to the delay of fuel subsidy limits, stabilization stabilisation in food prices and slower-than-expected BI rate hikes. The high-frequency consumption indicators including consumer sentiment (112.3 in Feb), motor vehicle sales (+39.8% YoY y-o-y in Jan) and motorcycle sales (+32.3%) broadly held up well in 1Q. Meanwhile, Indonesia ’s commodity-based exports are growing strongly thanks to still-resilient growth in the emerging economies including China and the acceleration in US economic recovery. Admittedly, there are risks of a consumption-led growth slowdown in 2H should the government push forward fuel subsidy cuts amid a sustained rise in global oil prices. Still, growth momentum in the beginning of the year always has strong influence on the annual growth for the whole year. A stronger-than-expected 1H elevates our annual growth forecast for 2011 (for more details, please see “Economics-Markets-Strategy” due to be release this week).