Ageing before my years

Been extremely forgetful lately, so this is sort of a reminder as to the trade I would like to put on if I could.


The meeting yesterday was communicative, though not interactive. Amongst all the views presented, the one thing that stuck was the inflation rate thatIndonesiawas seeing.


The low interest rates whichIndonesiaprinted in July at 4.61% did not come as a surprise, but a chord struck when food inflation was muted, unlike most other Asian economies. The data appeared quizzical to me from the June numbers, but I never went beyond puzzling over the lower food inflation, until the word “complacent” was thrown up.


The base year for the current basket of good is 2007, since thenIndonesiahas accelerated its pace of growth. The effects of growth, I believe, have perhaps trickled down faster than expected. The basket of goods used to measure the consumer price index is no longer applicable, as the demand for quality evolves. It does not make any sense to see one country have lower food inflation, when all other countries in the region are continuing to see large price pressures from food. Despite the currency appreciation the Indonesian rupiah has seen, I do not think it justified to explain the fall in food inflation.


If this proves correct in the future, then the BI would be seen to be severely behind the curve and would either have to 1) allow the rupiah to appreciate more or 2) hike rates. Interest rate hikes may be the first policy tool used, so as to minimize the magnitude of impact on exporters. The hike in rates can only mean one thing: steepening of the curve. At this point, I prefer the short end of the curve, pay rates at the long end.

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