Ferry Wong, head of Indonesia research at Macquarie Securities in Jakarta, said the central bank was behind the curve on inflation.
"I think some foreign investors were not too comfortable with the central bank's not raising interest rates despite high inflation," he said. (Reuters) BI’s decision to keep its policy interest rate at 6.5 per cent for the 17th month <http://www.bi.go.id/web/en/Moneter/BI+Rate/Data+BI+Rate/> 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<http://www.bi.go.id/NR/rdonlyres/10AAF037-83D2-4972-A561-8DFF73D22DE9/21042/GBI_IndonesiaInvestmentForumJakarta.pdf>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<http://dds.bps.go.id/eng/brs_file/eng-inflasi-01dec10.pdf>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<http://www.ft.com/cms/s/0/f730a2b6-1c26-11e0-9b56-00144feab49a.html#axzz1Ab0kjIbh>are effective, and everyone else is tightening<http://www.ft.com/cms/s/3/60a426c4-fd31-11df-b83c-00144feab49a.html#axzz1Ab0kjIbh>too. (Financial Times).
