Indonesia's inflation jumps to 7-year high, sparks calls for rate hike

Indonesia's inflation accelerated to its highest in seven years, above the central bank's target range, while core inflation remained within target, official data showed on Monday, triggering calls for an interest rate hike.

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 said they prefer to determine the pace of monetary tightening by looking at the core inflation rate.

The central bank has raised banks' reserve requirement ratio, sold some of its bond holdings and reduced excess liquidity using its open market operations this year, in moves to unwind some of its COVID-19 pandemic stimulus.

It has kept its benchmark rate at a record low of 3.50% since February 2021, making it one of the world's least hawkish central banks. Indonesia's inflation had been relatively under control because of heavy government subsidies for energy.

Economists 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," Radhika Rao, an economist with DBS said.

David Sumual, chief economist with one of Indonesia's biggest lenders BCA, said BI may act when it meets on Aug. 22-23 with a 25 or 50 basis point rate hike.

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

Maybank Indonesia economist 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 try to narrow the gap between Indonesian and U.S. interest rates.