BI plans to raise rates to stem inflation

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