Indonesian inflation cools, but no room seen for rate cuts due to weak rupiah

JAKARTA (REUTERS) - Indonesia's high annual inflation rate cooled in September and should drop more by year-end, but it likely will be 2016 before the central bank can cut interest rates to help an economy growing at its slowest pace in six years.

The statistics bureau on Thursday (Oct 1) said September's annual inflation rate was 6.83 per cent, the lowest since April. It was 7.18 per cent in August.

On a monthly basis, the consumer price index declined 0.05 per cent in September, the first drop since February, thanks to lower food prices.

Inflation, higher in Indonesia than elsewhere in Asia, spiked to 8.36 per cent in December, a month after President Joko Widodo raised then-subsidised fuel prices by more than 30 per cent.

The high level has been a factor blocking Bank Indonesia (BI) from lowering its benchmark interest rate, at 7.50 per cent since February.

Businesses want a lower rate to aid economic growth. In the second quarter, the annual pace was 4.67 per cent, the worst since 2009.

But even if the inflation pace drops sharply because of the high year-before base, economists see no room to cut interest rates, due to continuing weakness of the rupiah.

"I seriously doubt the BI has space to cut rates at this juncture," said Vaninder Singh, Southeast Asia economist at RBS in Singapore said. "Stability of the rupiah is their primary concern."

Arga Samudro, Ciptadana Securities economist in Jakarta, said inflation might be less than 4 per cent by year-end but it's difficult to see BI following the steps of India, which on Monday took advantage of low inflation to cut its policy rate 50 basis points.

"The condition here and in India is very different," he said.

On Wednesday, BI deputy governor Perry Warjiyo said "If we look at this year's inflation expectation of 4.3 per cent and the need to promote economic growth, there is a justification for a rate-cut."

"The problem is there are global pressures on the rupiah exchange rate and BI takes that into consideration when we decide on our policy rate," he added.

BI on Wednesday unveiled a set of measures intended to defend the rupiah, trading at 17-year lows.

Ahead of Thursday's inflation data, ING said the rupiah depreciation of more than 15 per cent this year is "making inflation sticky downward". It said it might revise up its current forecast for a benchmark interest rate of 7.25 per cent at year-end.

BI's next policy meeting is on Oct 15.