BI expects inflation to drop to 4.5%

The Jakarta Post, Jakarta

Bank Indonesia expects inflation this year to fall to 4.5 percent -- the lowest in four years -- from more than 10 percent last year mainly because of the ample food supply and a stronger rupiah.

The central bank said in a press statement on Wednesday that the cumulative inflation rate from January to November was 4.8 percent.

It added that inflation next year was projected to remain low at 5.5 percent.

The government in the current state budget has targeted a full-year inflation rate of 9 percent.

The low inflation environment has allowed the central bank to aggressively cut its benchmark interest rate, a move that has been expected to push banks to also lower their lending rates so that the corporate sector could borrow more money. The lower benchmark interest rate has also eased the burden of the government in repaying its huge domestic debts, the rates of which are linked to the interest rate of Bank Indonesia SBI promissory notes.

The interest rate on the one-month SBI notes declined slightly to 8.42 percent at the Wednesday weekly auction, compared to 8.43 percent in the previous week. The benchmark rate was hovering at more than 13 percent at the beginning of this year.

Bank Indonesia said that this year the rupiah ranked third in Asia, after the baht and the yen, in registering the highest rise against the U.S. dollar.

The central bank attributed the sharp appreciation of the local unit to a strong inflow of foreign funds used to finance the acquisition of local assets offered through the government privatization program and asset sales by the Indonesian Bank Restructuring Agency.

The rupiah closed unchanged at Rp 8,495 per dollar on Wednesday. At this level, the local unit has appreciated by around 8 percent in value compared to Rp 9,318 per dollar at the end of last year.

A stronger rupiah would lower production costs here as the country's production system is still heavily dependent on imported raw materials.

Elsewhere, Bank Indonesia said that the economy was expected to grow at 4 percent this year, mainly driven by domestic consumption as happened during the past couple of years.

The central bank had previously targeted the economy to expand by between 3.5 percent and 4 percent.

The economy as measured by gross domestic product grew by 3.6 percent in 2002.

Bank Indonesia said investment and export performance fared better than last year although they continued to have a limited impact on overall growth.

The 4 percent growth should be able to generate some 1.6 million new jobs, the central bank said, while acknowledging that it was far from enough to absorb some 2.5 million new job seekers entering the job market each year.

Analysts have said that in order to be able to resolve the huge unemployment problem in the country, the economy must grow by between 6 percent and 7 percent, which means that investment and export growth must be pushed higher.