BI hints at further rate hikes to stem inflation
Urip Hudiono, The Jakarta Post, Jakarta
The central bank has indicated it would have to raise interest rates again to ward off the possibly of strong inflationary pressures arising from the government's upcoming plan to increase fuel prices later this week.
Bank Indonesia (BI) senior deputy governor, Miranda S. Gultom, said on Wednesday that full-year inflation may likely exceed the central bank's estimate of 9 percent, due to the inevitable inflationary effect that the fuel price increases will have on the price of goods and services in the country.
"On-year inflation has already reached 8.33 percent at present, and it is highly probable that it will rise further rising depending on how much the fuel price hike will be," she said, adding that BI's 9 percent estimate had yet to factor in effects of the fuel price increase.
"If it does (factor in the effects), then inflation may be higher."
The 2005 state budget, whose final revision was finally approved by the House of Representatives late on Tuesday after a six-hour debate and a 273-to-83 vote, estimates a full-year inflation of 8.6 percent and a fuel subsidy cost of only Rp 89.2 trillion, which implies fuel prices will have to be raised.
President Susilo Bambang Yudhoyono confirmed last week that the government will increase fuel prices starting Oct. 1, although the percentage rise is still to be determined.
The last fuel price hike in March caused on-year inflation during the month to shoot up to 8.81 percent.
In light of this, Miranda explained that BI would have to raise interest rates again as part of its tight-biased monetary policy to keep the inflationary effects of the fuel price rise in check, as well as keeping the rupiah attractive for investment.
"If there is a rise in inflation, the central bank will respond by raising interest rates," she said, declining to mention how much the next rate hike would be, pending BI's assessment of the situation.
"It will neither be too small nor too large," she said.
While higher interest rates help stem inflation and keep the rupiah attractive, it also has a side-effect of potentially slowing down economic growth, which is expected to reach 6 percent this year, as business credit becomes more expensive.
The central bank had twice raised its benchmark BI rate last month, from 8.75 percent to 9.5 percent, and then again to 10 percent, as part of monetary measures to prevent the rupiah from a further slump against the U.S. dollar, with surging oil prices bloating the cost of the fuel subsidy and denting confidence in the country's hard-gained fiscal sustainability.
Th rupiah has since stabilized at around Rp 10,200 to the greenback, although it slipped to Rp 10,346 on Wednesday amid heightening tensions from public protests ahead of the fuel price hike.