BI rate hike 'key' to stem inflation<\/p>\n
Urip Hudiono, The Jakarta Post, Jakarta<\/p>\n
The central bank's latest 1 percent rate hike will without doubt
\nundermine this year's economic growth, a finance ministry senior
\nofficial said, but was necessary to prevent a prolonged rise in
\ninflation which may hurt the economy even more.<\/p>\n
Head of the Ministry of Finance's Economic, Financial, and
\nInternational Collaboration Studies Agency, Anggito Abimanyu,
\nsaid on Wednesday the government and Bank Indonesia (BI)
\nconcurred that inflationary pressures building up after a recent
\nfuel price hike were currently the main concern, and that a rate
\nhike was then needed to release some of that steam.<\/p>\n
\"Of course there will be some sacrifices (arising from the
\npolicy), among them a slower economic growth, but it is needed to
\ncontain a rise in inflation and keep the rupiah attractive,\" he
\nsaid.<\/p>\n
\"If we can absorb that rise in inflation within this year,
\nthen we can expect a new equilibrium to be created next year,
\npaving way for a better economic growth.\"<\/p>\n
With the latest rate hike, Anggito admitted that a 6 percent
\ngross domestic product (GDP) growth target in this year's state
\nbudget would be too high, and that the government will only be
\nexpecting a growth of between 5.7 percent and 6 percent.<\/p>\n
\"But the (6 percent) target could still be achieved, if we
\nspeed up investment realization and government spending by the
\nend of the year,\" he said.<\/p>\n
The central bank raised on Tuesday its benchmark BI Rate by
\n100 basis points (bps) to 11 percent, in anticipation of
\ninflation that could hit 12 percent following the government's
\nmove to more than double the average price of subsidized fuels.<\/p>\n
The hike is the fourth since the central bank launched in July
\nthe BI Rate as its new inflation-targeting instrument, replacing
\nits three-month SBI promissory notes rate.<\/p>\n
The central bank first raised the BI Rate to 8.75 percent to
\nhelp stem inflation, and then 9.25 percent and 10 percent to help
\nbreak the rupiah's slump against the U.S. dollar, all within
\nAugust.<\/p>\n
BI governor Burhanuddin Abdullah had said the latest hike was
\nnecessary to maintain the more important aspect of macroeconomic
\nstability, even though it might hurt businesses.<\/p>\n
State Minister for National Development Planning Sri Mulyani
\nIndrawati had said as well that there would be a trade-off
\nbetween containing inflation and sustaining economic growth
\nfollowing the fuel price hike, BI's rate hike in response, and
\nthe latest Bali bombings, estimating the economy to slow down to
\n5.7 percent. Indonesia's economy had expanded by 5.86 percent
\nduring this year's first half, and 5.13 percent last year.<\/p>\n
Like a double-edged sword, raising interest rates help stem
\ninflation, but could also dampen economic growth as it may
\nencourage banks to raise their commercial lending rates, making
\nit pricier for businesses to obtain capital for their expansion
\nneeds.<\/p>\n
Meanwhile, concerning next year's economic growth prospects,
\nAnggito remained upbeat that the economy could grow between 6
\npercent and 6.1 percent, citing better economic conditions.<\/p>",
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