Analysis (1): Challenging BI, Asia’s biggest dove

REPUBLIKA.CO.ID, JAKARTA/SINGAPORE - Indonesia just recorded its strongest annual growth rate in 15 years and shows no sign of a significant 2012 slowdown, yet its central bank, Bank Indonesia (BI), is Asia's most dovish. Investors appear to have no concerns about that disconnect, judging from demand for Indonesia's debt at an auction this week that was so strong the offering was expanded by 50 percent.

But inflation looks set to rise in the next couple of months, spurred by strong domestic demand, a spike in food prices from harvest-impeding rains, and the government's plan to boost fuel and power prices. That could force Bank Indonesia into a policy U-turn that undermines its credibility.

"We think they'll ultimately have to change tack," said Leif Eskesen, an economist with HSBC in Singapore who has been critical of BI's unexpected interest rate cuts in October and November. "Too much insurance has basically been taken out against a slowdown in growth."

The central bank holds its next policy-setting meeting on Thursday, and economists in a Reuters poll widely expected it to hold rates steady. In fact, a growing number now think rates will be on hold all year, a sharp change from mid-January when the consensus call was for at least one more cut.

In Asia, Indonesia's economic growth rate trailed only China and India in 2011, and it weathered a global slowdown in the second half far better than its larger Asian peers.

It has recorded five consecutive quarters of year-on-year growth above 6 percent, and 2011's pace of 6.5 percent was the strongest since 1996, just before the Asian financial crisis left Indonesia limping to the International Monetary Fund for a bailout.

Economists are looking for 2012 growth of 6.1 percent, a milder slowdown than they have predicted for China, where growth is forecast to dip to 8.4 percent from 2011's 9.2 percent.

Despite the string of steady growth, BI has delivered rate cuts and imposed other measures that economists estimate add up to 175 basis points worth of effective easing since October. Compare that with Thailand, where flooding ravaged the economy, yet the central bank has lowered interest rates by a relatively modest 50 basis points.