Indonesia, Philippines hike rates to check soaring prices

IN A fresh attempt by policymakers to curb inflation, central banks in Indonesia and the Philippines increased their benchmark interest rates by 25 basis points on Thursday, the Financial Times (FT) has reported.
Manila's move, which took rates up to 5.25 per cent, was its first in three years. It came hours after the government announced year-on-year inflation had hit a nine-year-high of 9.6 per cent.

As for Jakarta, Thursday's rise to 8.5 per cent followed a similar rise last month, the first since December 2005, when rates hit 12.75 per cent.

Indonesia's year-on-year inflation last month was 10.38 per cent, the highest since September 2006, FT reported.

According to analysts, India and Malaysia, which both hiked petrol prices this week, were also likely to raise rates soon.

Some said the Reserve Bank of India might increase its benchmark rate from 7.5 per cent before its rate-setting meeting next month.

PHILIPPINES
Year-on-year inflation: 9.6%
New benchmark interest rate: 5.25%

INDONESIA
Year-on-year inflation: 10.38%
New benchmark interest rate: 8.5%

Elsewhere, Taiwan's core inflation rate, which measures consumer prices, excluding food and energy, rose from 3.1 per cent to 3.23 per cent last month, its biggest gain in nine years.

China's inflation hit 8.5 per cent in April, but Beijing was expected to announce a small reduction for the year-to-May period.

Jakarta's increase in interest rates was only half as large as many analysts expected. It followed a warning from the state statistics bureau on Monday that the impact of a 28.7 per cent increase in fuel price last month had yet to feed through into the data.

However, Dr Boediono, Bank Indonesia's governor, said he would also use other tools at his disposal to control inflation.

These included acting on the exchange rate and absorbing excess liquidity by moving the benchmark rate from a monthly to an overnight rate, reported FT.

Mr Fauzi Ichsan, an economist at Standard Chartered Bank in Jakarta, said the rise in Indonesia's benchmark rate was 'cautious but probably right' because inflation was being driven by global factors.

He expected interest rates to rise to between 9 per cent and 9.5 per cent at the end of the year.

FT quoted the Philippine central bank as having said its move was partly motivated by indications that supply-driven pressures were beginning to feed into demand.

'Recent business and consumer confidence surveys also indicate an upward shift in inflation expectations, coinciding with increased term spreads on government securities and higher secondary market yields,' the Philippine central bank said.

Mr Frederic Neumann, an economist at HSBC, said the Philippine central bank would probably increase rates gradually to 5.75 per cent by the end of the year.

Faster inflation has increased pressure on President Gloria Arroyo to boost spending for subsidies to help poor households cope with rising food and energy prices.