Thu, 10 Mar 2005


BI plans to raise rates to stem inflation

Indonesia's central bank said it will raise interest rates in "a gradual and measured manner" this year because a government decision to increase fuel prices threatens to stoke inflation.

"To mitigate inflationary pressure due to the fuel-price increase, there is a need to make more preventative and other efforts," Erwin Riyanto, Bank Indonesia's head of public relations, said in a statement late on Tuesday after a meeting of the bank's board of governors.

The inflation rate, already close to a 21-month high, may rise further after the March 1 decision by the government of President Susilo Bambang Yudhoyono to reduce fuel subsidies.

The central bank also wants to shore up the rupiah, which has weakened 1.1 percent this year, said economist Anton Gunawan.

"It's an effort to keep inflation in check and prevent the rupiah from declining further," said Gunawan of Citigroup Inc., who predicted that the central bank's key one-month rate would rise 1 percentage point or less this year from 7.43 percent.

"I don't think the central bank will increase the rates drastically," Gunawan said.

The 7.43 percent yield on one-month Bank Indonesia bills at the March 2 auction was unchanged from the previous sale on Feb. 16.

Consumer prices in February rose 7.2 percent from a year earlier, slowing from a 7.3 percent increase in January, which was the highest since April 2003.

Indonesia's government, moving to reduce its $3.1 billion budget deficit, last week scrapped most subsidies, leading to an average 29 percent rise in the cost of fuel.

The central bank repeated its forecast for economic growth of between 5 percent and 6 percent in the first quarter. -- Bloomberg