Wed, 22 Mar 2006
BI sees inflation down to 7% this year if power hike canceled
Urip Hudiono, The Jakarta Post, Jakarta

The central bank says inflation may ease to below 7 percent this year, providing it with greater leeway to lower its key interest rate, given that the government now appears set to cancel its proposed electricity price hikes.

Bank Indonesia warned, however, that there were still many obstacles to higher growth this year besides inflation and interest rates, particularly the problems of lack of legal certainty and poor policy implementation.

BI Governor Burhanuddin Abdullah told reporters on the sidelines of an investment seminar Monday that the cancellation of the proposed power price hikes would help bring inflation down to a lower-than-expected level.

"We had previously forecast inflation at 8 percent, plus or minus 1 percent, for this year. If it now leans more towards the minus end (due to the cancellation), than we can expect things to go better for the economy," he said.

The central bank's mid-point 8 percent inflation projection -- which is the same as the government's forecast -- has already factored in a 30 percent rise in electricity prices.

Vice President Jusuf Kalla said last Friday that the planned power hikes might not be necessary if the government could find additional subvention funds for state power firm PT PLN to cover the costs of its operations this year, and the firm itself could improve its efficiency.

Lower inflation would provide a significant boost for the economy as it would allow the central bank to reduce its benchmark interest rates, thus leading to lower business and investment costs in general.

Burhanuddin had said that BI might begin taking a "neutral stance" in its rate policy in the second half of the year, compared to its current "tight-biased stance".

The central bank has raised its key BI Rate six times to 12.75 percent from July last year to contain inflation that skyrocketed to 17.11 percent following last year's double fuel price hikes.

This devil's brew of high inflation and interest rates stymied Indonesia's consumption-driven economy in the second half of last year, slowing it down from 6.2 percent in the first quarter to 4.9 percent in the last quarter.

On-year inflation picked up again to 17.92 percent in February from 17.03 percent in January, prompting BI to prudently leave its key rate intact at 12.75 percent for the last three months.

The government is officially targeting growth of 6.2 percent this year, while BI sees the economy capable of expanding by between 5 and 5.7 percent.



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