Indonesia fuel cuts to keep inflation in check

3 April, 2016 12:00 AM printer

INDONESIA: Indonesian sovereign bonds rose this week, pushing the 10-year yield down the most in a month, on speculation a cut in domestic fuel prices will keep inflation in check.
The price consumers pay for gasoline was lowered 7.2 percent to 6,450 rupiah ($0.49) a liter, while diesel was reduced 8.8 percent to 5,150 rupiah a liter. The changes are effective Friday and, while prices are reviewed every quarter, the new levels are hoped to be maintained for six months, Energy Minister Sudirman Said told reporters on Wednesday, reports Bloomberg.
The yield on the government’s 10-year bonds fell seven basis points to 7.59 percent in Jakarta, according to the Inter Dealer Market Association. It’s dropped 18 basis points this week. Indonesian rupiah sovereign notes have returned 8.1 percent in three months, the most in Asia, according to Bloomberg indexes.
“The biggest driver was the decision on fuel-price cuts,” said Dini Agmivia Anggraeni, a fixed-income analyst at Trimegah Securities in Jakarta. “This will have an impact on inflation in April and May.”
Consumer prices rose 4.45 percent in March from a year earlier, official data showed Friday, from 4.42 percent in February. Month-on-month inflation accelerated to 0.19 percent from minus 0.09 percent. Bank Indonesia has cut its benchmark rate three times this year, to 6.75 percent. The monetary authority will likely hold borrowing costs in April, but there will probably be more reductions later in 2016 and into 2017, Anggraeni said.
President Joko Widodo scrapped gasoline subsidies from the beginning of last year, but hasn’t let domestic prices move in lockstep with international ones and has declined to explain in detail how local prices are set. The cuts effective Friday take into account higher consumption during Ramadan and Eid al-Fitr in June and July, when many Indonesians travel to their home villages, the energy minister said.
The reduction in domestic prices puts them broadly in line with international ones when the recent appreciation of the rupiah is taken into account, said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. Brent crude rose 6.2 percent in the three months through March to $39.60 a barrel, while the Indonesian currency strengthened 4 percent against the dollar, following a 6.3 percent gain in the previous three months.
“The big question is, going forward, if oil prices surge before the next review whether they adjust upward in full,” Paracuelles said. Bank Indonesia will probably pause its rate-cutting cycle for the rest of this half, he said.