BI hints at further rate hikes to stem inflation
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.