The central bank is confident that the rupiah will remain within a trading band of between Rp 9,000 and Rp 9,500 against the U.S. dollar this year, despite a likely nudging up of consumer prices ahead.
"The chance for the rupiah to trade at below Rp 9,000 per dollar remains, but a comfortable level for both exporters and importers would be between Rp 9,000 and Rp 9,500. And, I think we can maintain it at that level for the rest of the year," Bank Indonesia Deputy Governor Aslim said during a hearing Monday with the House of Representatives.
Aslim, however, warned that this would depend on the fulfilling of a number of conditions, namely, continuing improvements in Indonesia's macroeconomic fundamentals, its balance of payments and the inflation rate.
Indonesia's balance of payments is currently strongly in the black, with the country's foreign exchange reserves standing at some $46 billion on the back of strong exports. Easing global rate trends have also helped keep rupiah-based assets attractive to investors.
The only concern is on the inflationary front. BI Governor Burhanuddin Abdullah said there was a possibility that inflation could reach the upper level of the central bank's 5 to 7 percent estimate for this year.
"Inflation will be higher in the early months of 2007. I think inflation in February will be twice the normal level because of the floods," Burhanuddin said during the same hearing Monday.
Recent floods affecting Jakarta and other regions have particularly affected the price of rice, the national staple, and possibly average consumer prices as well. These rose by an on-year 6.26 percent in January, after gaining 6.6 percent in December.
Inflation in February 2002, when similar floods occurred, rose to 15.13 percent from 14.14 percent the previous month.
Higher inflation could translate into deflationary action by the central bank, such as calling a halt to its recent rate cuts, which have brought the bank's reference rate down to 9.25 percent thus far.
Although higher rates help support the prices of rupiah-based assets, they -- along with higher inflation -- could also affect confidence in the prospects for Indonesia's still largely consumption-based economy, and eventually in the rupiah.
The economy managed to grow by 5.5 percent last year -- slightly lower than 2005's 5.6 percent, and well below the government's 5.8 percent target -- on lower consumption and investment.
In this year's budget, the government has assumed a rupiah exchange rate of Rp 9,300 per dollar, inflation of 6.5 percent and growth of 6.3 percent.
The rupiah, which has lately been tracking other currencies in the region to gain against the American greenback, was trading slightly higher at Rp 9,065 to the dollar Monday compared with Rp 9,075 last Friday.
Find Article by Date