VZCZCXRO7501
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1694 2520821
ZNR UUUUU ZZH
R 080821Z SEP 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0008
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2464
RUEHBJ/AMEMBASSY BEIJING 5362
RUEHBY/AMEMBASSY CANBERRA 3000
RUEHUL/AMEMBASSY SEOUL 4884
RUEAIIA/CIA WASHDC

UNCLAS JAKARTA 001694 
 
SIPDIS 
SENSITIVE 
 
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. 12598: N/A 
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: BI CONTINUES RATE HIKES DESPITE INFLATION DIP 
 
¶1. (SBU) Summary.  On September 4, Bank Indonesia (BI) increased its 
overnight reference rate 25 basis points for the fifth consecutive 
month, despite a dip in inflation in August.  While price increases 
slowed in aggregate, food and education prices continued to climb. 
Lower world commodity prices eased price pressures but also 
contributed to a negative trade balance in July, putting downward 
pressure on the Rupiah.  In addition to raising the overnight rate, 
BI continued to intervene in the foreign exchange market to support 
the value of the Rupiah.  Foreign exchange reserves fell by $2.2 
billion during the month of August. End Summary. 
 
August Inflation Slows, but Food Prices Remain High 
--------------------------------------------- ------ 
 
¶2. (U) Inflation slowed on a month-on-month basis in August, 
dropping to 0.51% from 1.37% the previous month, due in large part 
to a moderation in the price of global commodities, especially oil. 
The yoy inflation rate now stands at 11.85%.  Domestic food and 
education prices continued to rise in August, accounting for the 
bulk of the month-on-month price increase.  Food prices have 
increased 20.1% since August 2007.  Prices of protein-rich foods 
such as poultry and eggs continued to soar in August due to high 
feed costs, bringing their year-to-date increase to 70.7% and 27.0%, 
respectively.  Wholesale prices have increased at a faster pace than 
consumer prices.  According to the most recent published data, the 
wholesale price index jumped 6.0% month-on-month from May to June, 
bring the year-on-year wholesale inflation rate in June to 35.0%. 
 
BI Continues to Tighten 
----------------------- 
 
¶3. (SBU) BI continued to tighten monetary policy in September and 
signaled the use of multiple monetary tools, in moves applauded by 
most analysts.  Despite slower price increases in August, BI 
increased its overnight reference interest rate to 9.25% from 9.0%, 
citing ongoing inflationary pressures from strong domestic demand. 
Key concerns include the rapid growth in bank credit (35% 
year-on-year as of mid-August) and the surge in imports (52.3% 
year-on-year in June).  Analysts also note that wholesale firms have 
not yet fully passed on price increases to consumers.  As in 
previous months, BI hinted at plans to raise reserve requirements to 
slow loan growth in the coming months. 
 
¶4. (SBU) BI also continues to intervene in the foreign exchange 
market, using $2.2 billion in foreign exchange reserves to defend 
the value of the Rupiah in August alone.  Indonesia's foreign 
exchange reserves currently stand at $58.4 billion.  Indonesia 
recorded a trade deficit in July due to strong demand for imports 
and declining world prices for Indonesia's commodity exports. 
Analysts expect these trends to continue, putting downward pressure 
on the currency and triggering additional intervention from BI to 
control imported inflation.  Investors are likely to pay close 
attention to Indonesia's foreign exchange reserve levels and trends 
as an indicator of balance of payments and macroeconomic stability 
in the coming months.  Indonesia recorded an overall balance of 
payments surplus of $1.3 billion in the second quarter of 2008; 
however, short-term capital inflows were the primary driver of the 
surplus. 
 
HUME