BI rate hike 'key' to stem inflation

BI rate hike 'key' to stem inflation

Urip Hudiono, The Jakarta Post, Jakarta

The central bank's latest 1 percent rate hike will without doubt
undermine this year's economic growth, a finance ministry senior
official said, but was necessary to prevent a prolonged rise in
inflation which may hurt the economy even more.

Head of the Ministry of Finance's Economic, Financial, and
International Collaboration Studies Agency, Anggito Abimanyu,
said on Wednesday the government and Bank Indonesia (BI)
concurred that inflationary pressures building up after a recent
fuel price hike were currently the main concern, and that a rate
hike was then needed to release some of that steam.

"Of course there will be some sacrifices (arising from the
policy), among them a slower economic growth, but it is needed to
contain a rise in inflation and keep the rupiah attractive," he
said.

"If we can absorb that rise in inflation within this year,
then we can expect a new equilibrium to be created next year,
paving way for a better economic growth."

With the latest rate hike, Anggito admitted that a 6 percent
gross domestic product (GDP) growth target in this year's state
budget would be too high, and that the government will only be
expecting a growth of between 5.7 percent and 6 percent.

"But the (6 percent) target could still be achieved, if we
speed up investment realization and government spending by the
end of the year," he said.

The central bank raised on Tuesday its benchmark BI Rate by
100 basis points (bps) to 11 percent, in anticipation of
inflation that could hit 12 percent following the government's
move to more than double the average price of subsidized fuels.

The hike is the fourth since the central bank launched in July
the BI Rate as its new inflation-targeting instrument, replacing
its three-month SBI promissory notes rate.

The central bank first raised the BI Rate to 8.75 percent to
help stem inflation, and then 9.25 percent and 10 percent to help
break the rupiah's slump against the U.S. dollar, all within
August.

BI governor Burhanuddin Abdullah had said the latest hike was
necessary to maintain the more important aspect of macroeconomic
stability, even though it might hurt businesses.

State Minister for National Development Planning Sri Mulyani
Indrawati had said as well that there would be a trade-off
between containing inflation and sustaining economic growth
following the fuel price hike, BI's rate hike in response, and
the latest Bali bombings, estimating the economy to slow down to
5.7 percent. Indonesia's economy had expanded by 5.86 percent
during this year's first half, and 5.13 percent last year.

Like a double-edged sword, raising interest rates help stem
inflation, but could also dampen economic growth as it may
encourage banks to raise their commercial lending rates, making
it pricier for businesses to obtain capital for their expansion
needs.

Meanwhile, concerning next year's economic growth prospects,
Anggito remained upbeat that the economy could grow between 6
percent and 6.1 percent, citing better economic conditions.