BI raises interest rate to 11 percent

Urip Hudiono, The Jakarta Post, Jakarta

The central bank raised on Tuesday its key interest rate to 11 percent, in anticipation of a full-year inflation that may hit 12 percent following last week's fuel price hike.

Bank Indonesia (BI) also cut its outlook on this year's economic growth to 5.7 percent, citing weak investment growth and exports.

Announcing the central bank's latest assessment of Indonesia's economy, BI Governor Burhanuddin Abdullah said the bank had decided to raise its benchmark BI Rate by 100 basis points to 11 percent, in light of a likely continuing increase in inflation, due to the Oct. 1 fuel price hike and the usual upward inflationary trend ahead of the year-end holidays of Idul Fitri, Christmas and New Year.

Burhanuddin explained that BI viewed the situation could push inflation further up by between 2.25 percent and 3 percent, meaning it could reach 12 percent by the end of the year.

"And this is an optimistic estimate, which has already factored in our policy to increase interest rates," he said, hinting future adjustments.

The government more than doubled the average price of fuel last week to reduce the fuel subsidy, amid soaring global oil prices that hover at around US$65 per barrel that have been straining the state budget.

The Central Statistics Agency (BPS) reported on Monday that the prices of goods and services in the country had increased by 0.69 percent in September from August, resulting in a 6.39 percent accumulated inflation during the year's first nine months, or 9.06 percent on a year-on-year basis.

State Minister for National Development Planning Sri Mulyani Indrawati had estimated that inflation could surge by 3 percent to 12 percent. Coordinating Minister for the Economy Aburizal Bakrie and Minister of Finance Jusuf Anwar, however, remained upbeat that inflation would remain in the single digits.

Burhanuddin said though the rate hikes may hurt businesses, they were essential to maintain a stable macroeconomic environment needed for investment, exports and the businesses themselves.

This year's economic growth would slow down to 5.7 percent and to 5.9 percent next year, he said, due to Indonesia's weak performance in attracting investments and boosting exports. BI had previously estimated the economy to grow by 5.9 percent this year and 6.1 percent next year.