Indonesia inflation jumps to 7-year high, central bank unfazed

By Gayatri Suroyo and Stefanno Sulaiman

JAKARTA (Reuters) - Indonesia's inflation accelerated to a seven-year high driven by soaring food prices, data showed on Monday, sparking calls for an interest rate hike, though the central bank governor signaled he was unperturbed as core inflation remained low.

At 4.94%, the July inflation rate was the highest since October 2015, reflecting rising prices of food, household fuel and airfare, and hikes in some electricity tariffs.

A Reuters poll had expected a rate of 4.82%. June's rate was 4.35%.

The July core inflation rate, which strips out government-controlled prices and volatile food prices, was roughly in line with expectations at 2.86%, rising from 2.63% a month prior.

Bank Indonesia's (BI) target range for headline inflation is 2% to 4%, but policymakers have stated a preference for determining the pace of monetary tightening by looking at the core inflation rate.

Governor Perry Warjiyo reiterated that on Monday, highlighting that core inflation was below BI's 2.99% forecast.

Although the headline rate was slightly above prediction, food supply to year-end is set to rise and food inflation will ease, Warjiyo told a news conference

"BI's interest rate policy is based on core inflation and economic growth," he said.

Finance Minister Sri Mulyani Indrawati called the July inflation rate "relatively moderate" compared with peers.

BI has launched measures to reduce excess liquidity in the financial market, in moves to unwind some of its pandemic stimulus, but it has kept its benchmark rate at a record low 3.50% since February 2021, making it one of the world's least hawkish central banks.

Indonesia's inflation had been relatively under control due to heavy government energy subsidies.

Economists, however, said a rate hike is imminent.

"Even as core inflation is under watch by policymakers, negative real rates and the need to anchor inflationary expectations might tilt the policy focus towards incremental hikes by late-3Q," said DBS economist Radhika Rao.

David Sumual, chief economist with Indonesian lender BCA, said BI may act when it meets on Aug. 22 and Aug. 23 with a 25 or 50 basis point rate hike.

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"Headline inflation is almost 5%, it looks on course to pass 5% this year. So I think there should be an adjustment," he said.

But Maybank Indonesia's Myrdal Gunarto said BI could still keep interest rates unchanged this month, as pressure on the rupiah exchange rate has eased, but it should raise rates in September to narrow the gap between Indonesian and U.S. interest rates.