Bank Indonesia expects limited inflationary impact of fuel hike
The Jakarta Post, Jakarta
The central bank expects that the government's plan to cut the fuel subsidy and increase the price of fuel prices at home next year will have limited impact on inflation.
Bank Indonesia deputy governor Maman Sumantri said on Friday the central bank would prepare certain measures to help minimize the impact on inflation.
"Inflation is not only caused by price factors, but other factors such as the amount of currency in circulation, the rupiah exchange rate, and supply of goods," he said.
Maman explained that Bank Indonesia would make adjustments to influence the other factors and minimize the impact of the fuel hike on inflation.
"For instance, we might adopt a (monetary) tightening policy, although it is not always necessary," he said.
"The inflation target for next year is 6.5 percent, with an anticipated decline to 6 percent and 5.5 percent in the following years. These are our targets," he said.
Coordinating Minister for the Economy Aburizal Bakrie said on Thursday that the government would reduce the costly fuel subsidy next year, which would bring about an increase in the prices of certain fuel products at home.
The hike in fuel prices would affect the cost of production, which in turn would be passed on to consumers by businesses in the form of higher prices of goods and services, thus creating inflationary pressure.
The central bank has been working hard for the past couple of years to bring down inflation from the sky-high level of nearly 78 percent in 1998 during the financial crisis. The current relatively mild inflation environment has allowed Bank Indonesia to cut its domestic interest rate to record lows, making bank loans more affordable for the corporate sector to finance expansion plans. But inflation has started to peak again lately at around 7 percent due to the weakening of the rupiah and the indirect impact of the oil hike on the international market.
It is still not clear how much the government will increase fuel prices. But some experts have said that a 10 percent hike in fuel prices was expected to add about 0.6 percent in inflation.
Reducing the fuel subsidy would be one of the most challenging tasks for the new government of President Susilo Bambang Yudhoyono as the current surge in oil prices has inflated the fuel subsidy, thus cutting budget spending on other important areas.
As international oil prices have soared to more than US$50 per barrel, the fuel subsidy for the 2004 state budget had been raised to Rp 59.2 trillion ($6.5 billion) compared to the initial allocation of Rp 14.5 trillion. The government could in fact take another Rp 3.8 trillion from an emergency fund post in case the subsidy cost further increases. In comparison, the fund allocated for development spending this year is around Rp 71 trillion.