Indonesia may be forced to follow Thailand

Bangkok:  Thailand's unexpected interest-rate increase may escalate pressure on Indonesia to follow suit after inflation accelerated in the world's fourth-most populous nation.

Thailand brought to three the number of boosts to borrowing costs in the Southeast Asian nation this year, matching Malaysia's moves. Indonesia, the region's largest economy, has yet to take the step, and will probably keep its benchmark rate at 6.5 per cent at a meeting today, according to all 20 economists in a Bloomberg News survey.

Indonesia's performance on inflation will play a part in helping the country win a higher debt rating, Moody's Investors Service said yesterday, a step that may lower credit costs and spur foreign direct investment in the nation. Thailand, whose three-year debt yields are less than half Indonesia's, enjoys an investment-grade Moody's rating four steps higher than its neighbour's.

"Indonesia is the only major emerging economy in Asia not to have made a move to normalise policy settings this year," said Brian Jackson, an emerging-market strategist at Royal Bank of Canada in Hong Kong. "Officials have shown a preference to use other policy tools to manage liquidity and price pressures. This approach, however, looks increasingly untenable."

The Bank of Thailand raised the one-day bond repurchase rate by a quarter of a percentage point to 2 per cent yesterday, saying it will continue to "normalise" borrowing costs amid increasing inflationary pressures even as the timing for future moves will be dependent on the economic situation.

In contrast, Bank Indonesia Deputy Governor Budi Mulya said last week the country's benchmark rate is "still relevant" for achieving the central bank's 2011 inflation target of 4 per cent to 6 per cent.