On Thursday (02/01), Statistics Indonesia (BPS) released the December 2013 inflation figure of Indonesia as well as the calender inflation rate for full-year 2013. Higher food prices and house prices were the main contributors to the 0.55 percent inflation rate in December 2013. Seasonal celebrations, like Christmas and New Year, always translate into higher inflationary pressures in Southeast Asia's largest economy. Higher fuel prices were the main contributor to the 8.38 percent inflation rate in full-year 2013.
Total inflation of 8.38 percent in 2013 is high but lower than upward revised projections of Indonesia's central bank (Bank Indonesia) and the Indonesian government after prices of subsidized fuels were raised in late June 2013 in order to relieve the government's budget deficit and curb the country's current account deficit which had widened to USD $9.8 billion (or 4.4 percent of GDP in the second quarter of 2013). At the start of the year, Bank Indonesia expected 4.5 percent of inflation in 2013, but after the fuel price hike it revised its forecast to between 9.2 and 9.8 percent. Since September 2013, however, Indonesia's inflation rate has been under control due to improved government regulation regarding food quotas and the moderating influence of the fuel price hike.
(annual percent change)
Source: Statistics Indonesia
Various analysts expect the central bank to raise its benchmark interest rate (BI rate) by 25 basis points to 7.75 percent in January 2014 to curb concerns about the current account deficit, support the rupiah exchange rate and offset any further potential impact of the Federal Reserve's tapering policy, which will commence this month. The Federal Reserve will reduce its bond-buying program (known as quantitative easing) by USD $10 billion to USD $75 billion per month. The looming end of the quantitative easing program in combination with the current account deficit and high inflation, have resulted in a sharply depreciated rupiah exchange rate in 2013. The currency fell over 26 percent against the US Dollar in 2013.| Source: Bank Indonesia
For 2014, Bank Indonesia (BI) expects inflation of 4.5 percent (plus or minus 1 percent). Governor of Bank Indonesia, Agus Martowardojo, estimates that inflation will ease in the first quarter of 2014 due to improved cooperation between Bank Indonesia and the government.