Indonesia’s GDP rises 6.5% in 2Q11

However, inflation pressures are still lurking as August core inflation reached a two-year high of 5.2% y-o-y.

HSBC says the country’s strong domestic economy will drive its growth in 2011.

Here’s more form HSBC:

Domestic engine powers growth

Indonesia’s 2Q GDP rose 6.5% y-o-y, unchanged from 1Q. In seasonally adjusted terms, the economy grew 1.6% q-o-q, above the 1% q-o-q expansion in 1Q and slightly faster than the historical average. Examination of the expenditure components shows that private consumption held up (4.6% y-o-y versus 4.5% in 1Q), government consumption accelerated (4.6% y-o-y versus 3.0% in 1Q) and net exports rose (22.9% y-o-y versus 1.3% in 1Q) led by strong exports. Meanwhile, investment also picked up smartly (9.2% y-o-y versus 7.3% in 1Q).

Looking ahead, we expect growth in Indonesia to hold up well, sustained by its strong domestic economy; we believe both private consumption and investment will remain stellar over the forecast horizon. Still very loose monetary policy settings also clearly play a role here. Moreover, as the economy is more domestically oriented, the expected softening in exports will not do much damage to headline growth, in our view.

With growth looking strong, inflation pressures are still lurking. In August, headline inflation came in at 4.8% y-o-y and core inflation picked up, reaching a two-year high of 5.2% y-o-y.

However, gold prices appear to have been the culprit, and their impact may well prove largely temporary. Nevertheless, as growth is set to remain strong this year and next, core inflation pressures are likely to remain firmly in place.

Still, Bank Indonesia is in no hurry to tighten policy rates despite its very accommodative stance. In fact, it slipped in a stealth easing at the last policy meeting, when it kept the policy rate unchanged at 6.75%, but then lowered the floor of its rates corridor to 150bp below the policy rate from 100bp before. Given its reluctance to tighten even before this summer’s drama on the global stage, we do not see BI tightening policy until next year.

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