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Indonesia's central bank may raise its benchmark interest rate for a third straight month to slow inflation that is forecast to reach a 21-month high in June.

Governor Boediono and his seven colleagues will increase the key rate to 8.75 percent from 8.5 percent, according to 14 of 18 economists in a Bloomberg survey. The board of governors will meet next on July 3 in Jakarta to set monetary policy.

Bank Indonesia has joined central banks across Asia in raising borrowing costs as soaring fuel and food prices stoke inflation. Consumer prices in Southeast Asia's largest economy probably rose 12.6 percent in June from a year earlier, according to the economists' survey, after the government in May increased fuel prices for the first time since October 2005.

The rate increases by Bank Indonesia “will be gradual, more to contain inflation expectations,'' said Fauzi Ichsan, chief economist at Standard Chartered Plc in Jakarta. The central bank will also raise borrowing costs to show “it recognizes the issue,'' he said.

President Susilo Bambang Yudhoyono's government raised fuel prices by about 30 percent to reduce its burden of capping pump costs. That made it more expensive to transport food, steel and cement across the 18,000 islands that make Indonesia the world's largest archipelago.

With consumer confidence at a 2 1/2 -year low, companies such as PT Ciputra Development may not immediately pass on higher costs of steel, cement and transportation to customers, said Harun Hajadi, a company director at Indonesia's third- largest property developer.

`Gradual Manner'

“There is no other way but to pass through the cost increase to customers,'' Harjadi said. Still, the company will not pass on the entire 15 percent increase in construction costs to customers straightaway, choosing to raise prices “in a gradual manner.''

The Central Statistics Bureau, which will change its base year to calculate inflation to 2007 from 2002, will release the data tomorrow check cash advance. Consumer prices rose 2.2 percent in June from a month earlier, according to economists in the survey, while core inflation, which excludes food prices, accelerated to 9.5 percent, according to the survey.

Bank Indonesia in May was the first central bank in Southeast Asia after Vietnam to raise borrowing costs this year. Vietnam raised its benchmark rate in January. India and the Philippines followed this month.

Malaysia may follow suit after the government raised petrol prices to stem crippling subsidy costs. Thailand may also adjust monetary policy next month.

Rising Currency

Bank Indonesia will also help strengthen the rupiah by selling dollars, Deputy Governor Hartadi A. Sarwono said on June 26. A rising currency will help lower costs of imported wheat, soybean and fuel.

“We will also intervene by selling dollars if there is huge demand from'' state oil and utility companies, Sarwono said. “We will enter the market to curb high dollar demand.''

The rupiah had its second weekly gain in the seven-day period ended June 27. The currency, which has declined 2 percent in the past year, fell 0.1 percent to 9,225 against the dollar at 10:47 a.m. in Jakarta.

The central bank will also have to watch out for a second round of inflation as salaries increase to match a rise in consumer prices, said David E. Sumual, an economist with PT Bank Central Asia in Jakarta.

“Bank Indonesia is currently willing to fight inflation with hawkish words,'' said Sumual. “This is typical of the dilemma a central bank will face,'' during stagflation.

The statistics agency will also release data showing exports rose 18.5 percent in May after gaining 23.1 percent a month earlier, according to economists surveyed. Imports from outside trade zones may increase 47 percent.

Source

Filed under: technology by Finance Boss