BI raises inflation forecast to 14%

BI raises inflation forecast to 14%

Bloomberg, Jakarta

The central bank raised its inflation forecast for this year to 14 percent and may boost interest rates because of the government's more-than-expected fuel price increase, Bank Indonesia Governor Burhanuddin Abdullah said on Monday.

It beats the earlier 12 percent estimate. The central bank expects October's inflation to accelerate 5.1 percent from the previous month, he said. Consumer prices rose 0.7 percent in September from a month earlier.

"There's a possibility we'll increase the interest rate," Burhanuddin said in a speech.

"We are keeping tight monetary policy until the first semester of next year."

Higher inflation may force the central bank to raise its reference rate for bill sales. Bank Indonesia raised the benchmark rate a full point to 11 percent on Oct. 4, the fourth increase in nine weeks.

The central bank's one-month bill, known as the Sertifikat Bank Indonesia, or SBI, last yielded more than 10.5 percent in May, 2003.

"If they feel by the end of the year inflation will reach 14 percent, indirectly they are saying that SBI interest rate will be at least 15 percent," said Purbaya Yudhi Sadewa, an economist at Danareksa Research Institute in Jakarta.

The central bank's inflation forecast is still low, he said.

Inflation accelerated at its fastest pace in 33 months in September as consumer prices in Southeast Asia's largest economy rose 9.1 percent.

President Susilo Bambang Yudhoyono's government on Oct. 1 almost tripled kerosene prices and more than doubled diesel tariffs to cap energy subsidies that have eroded confidence in the nation's finances and caused a currency slide in the only member of OPEC that is a net oil importer.

Gasoline prices were raised 87.5 percent.

The rupiah, which plunged to a four-year low on Aug. 30, has gained 4.4 percent after the government decided to raise fuel prices and the central bank's move to increase interest rates.

The rupiah is still down 7.9 percent this year against the U.S. dollar making it the second-worst performer among 15 currencies tracked by Bloomberg in Asia-Pacific.

The fuel-price increase forced transport cost to increase by as much as 60 percent in some parts of the archipelago from the 20 percent the central bank had expected, Burhanuddin said.

Indonesia's inflation rate reached a 26-month high of 8.8 percent in March after the government increased fuel prices by an average of 29 percent to cut subsidies.

September's 9.1 percent inflation rate was the highest since the statistical office changed its base year for the compilation of the consumer price index to 2002.