VZCZCXRO1377
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1307/01 1892253
ZNR UUUUU ZZH
R 072253Z JUL 08
FM AMEMBASSY JAKARTA
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 9467
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBJ/AMEMBASSY BEIJING 5188
RUEHBY/AMEMBASSY CANBERRA 2723
RUEHUL/AMEMBASSY SEOUL 4714
RUEHKO/AMEMBASSY TOKYO 2182
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 001307 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA - MALACHY NUGENT 
COMMERCE FOR 4430/KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
SINGAPORE FOR SBAKER 
TOKYO FOR MGREWE 
USDA/FAS/OA YOST, MILLER, JACKSON 
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER 
USDA/FAS/OGA CHAUDRY, DWYER 
USTR WEISEL, EHLERS 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: BANK INDONESIA RAISES RATES, AS INFLATION 
ACCELERATES 
 
REF: A) JAKARTA 1082 B) JAKARTA 1033 C) JAKARTA 1007 
 
¶1. (SBU) SUMMARY.  The Indonesian Central Bank, Bank 
Indonesia (BI), raised policy interest rates by 25 basis 
points to 8.75% on July 3, in line with market 
expectations.  Indonesia's headline consumer price 
inflation rate rose 2.46% in June, driven by continuing 
rising food prices and higher transport prices due 
to the May 24 fuel hike.  The 11.03% y-o-y inflation 
figure released in June cannot be properly compared 
to the 10.4% inflation rate registered in May due 
to significant methodology changes beginning with 
the June inflation data, particularly the use of a 
new base year and changed product weightings.  Y-o-y 
inflation would have registered over 12% without the 
methodological changes, according to analysts.  The 
Indonesian Statistics Agency did not report a core 
inflation rate for June.  END SUMMARY. 
 
Higher Transport and Food Costs Drive Inflation 
--------------------------------------------- -- 
 
¶2. (U) Transportation, communications and financial 
services rose 8.72% m-o-m in June, led by a 12.98% hike 
in transportation costs following the May 24 fuel hikes 
(Ref B).  Gasoline price increases alone contributed more 
than a third of the 2.46% m-o-m rise in inflation (0.83%). 
Food prices also continued rising, with unprocessed food 
prices up 1.28% m-o-m (driven by a 2.11% rise in the 
prices of rice, grains and tubers) and processed food, 
drink, cigarettes and tobacco up 1.33%.  It is difficult 
to gauge the impact of higher fuel and food prices on 
other products because the Statistics Agency did not 
release a core inflation rate for June.  However, prices 
were up significantly in each of the seven main 
expenditure categories, while only a few items 
registered price declines. 
 
Inflation Would Have Been Higher But For 
Methodology Changes 
----------------------------------------- 
 
¶3. (U) The June data inflation reflected use of a new 
base year (2007 vs. 2002), and the use of a new, larger 
consumer basket of products (774 products, up from 744), 
based on a 2007 Cost of Living Survey.    The new basket, 
which reflects changes in buying patterns, reduces the 
weighting of food (unprocessed and processed) to 36.12%, 
down from 43.38%, and increases the weighting of 
transportation to 19.1%, up from 14.47%.  Another change 
included a larger survey area covering 66 cities, up 
from the 45 cities previously covered.  The 11.03% y-o-y 
headline inflation rate reported in June would have been 
significantly higher (well over 12%, according to 
analysts) absent these methodology changes. 
 
Accelerating Inflation Prompts BI to Raise Rates 
--------------------------------------------- --- 
 
¶4. (U) June's accelerating inflation rate was widely 
expected and prompted BI to continue its recent monetary 
tightening.  On July 3, BI raised policy interest 
rates by 25 basis points to 8.75%, its third consecutive 
rate hike. 
 
¶5. (U) In remarks following the BI Board of Governors' 
meeting, BI Governor Boediono said the major source of 
inflationary pressure in 2008 is the impact of the fuel 
price hike and soaring food prices.  He stated BI also 
saw mounting demand side pressure in line with the rapid 
 
JAKARTA 00001307  002 OF 002 
 
 
expansion in credit and the money supply through the 
second quarter of 2008.  Pointing to indications of 
increasing inflation expectations, Boediono said BI 
considered it necessary to hike the BI rate to prevent 
further impact of fuel and food price increases to 
prices of other goods.  He stressed that BI will stay 
the course with flexible, measured use of existing policy 
instruments to curb inflation in 2009 within the 6.5% to 
7.5% range, and will coordinate actions very closely 
with the GOI.  Boediono also predicted Indonesia's 
economic growth will remain strong in 2008 and until 
the end of the 2009 national elections, buoyed by 
high levels of private consumption and Government 
expenditure and adequate export performance. 
 
¶6. (U)  A BI press release issued after the July 3 
meeting noted BI will continue to closely monitor the 
condition of the economy, which is still marked by 
various uncertainties.  It also noted BI expects 2008 
inflation will reach 11.5%-12.5%.  The BI expects 
Indonesia's balance of payments will continue showing 
good performance and have a positive impact on the 
stability of the exchange rate, according to the 
release.  It reported international reserves at 
end-June were $59.5 billion, equivalent to over 
five months' of imports and servicing of official 
foreign debt.  The statement said the overall 
condition of the banking industry reflected strong 
performance and resilience.  The release concluded 
that the BI rate policy will be supported by 
optimization of Open Market Operations and 
policies for bolstering exchange rate stability. 
 
¶7. (SBU) Analysts had expected both the acceleration 
in inflation in June and the July 3 BI rate hike. 
Going forward, most analysts expect BI to continue 
monetary tightening, as it attempts to anchor 
inflationary expectations and limit second round 
effects from higher food and fuel prices.  Forecasts 
of end-2008 BI policy rate have been creeping up 
and now range from 9% to 10%.  A number of analysts 
view BI's recent tightening moves as too little too 
late to avoid second round effects from emerging. 
With the real policy interest rate remaining 225 bps 
below the headline inflation rate, some of these 
same analysts predict BI will be forced to continue 
to tighten in 2009, despite upcoming elections. 
 
Continued Rising Oil Prices Increase Pressure 
on the Budget 
--------------------------------------------- 
 
¶8. (SBU)  The continued rise in world oil prices has 
also limited the budgetary relief realized from the 
GOI's May 24 reduction in fuel subsidies.  In remarks 
reported in the press July 3, President Yudhoyono 
said the GOI may have to spend 205 trillion rupiah 
(USD 22.2 billion) on fuel subsidies and 80 trillion 
rupiah (USD 8.66 billion) on electricity subsidies 
in 2008 if oil averages $145 per barrel IN 2008. 
 
HUME