BI to keep rates flat until yearend

Tony Hotland and Zakki P. Hakim, The Jakarta Post, Jakarta

Despite the soaring oil prices and the upcoming holiday festivities, the central bank has vowed to keep inflation in check and maintain low interest rates until the end of this year to help spur on business activities.

Bank Indonesia's senior deputy governor Miranda S. Goeltom acknowledged on Monday that the rocketing crude oil prices could affect domestic inflation, but said it would only be slight and temporary.

Also, the upcoming holidays -- Idul Fitri and Christmas -- would normally push up prices, but the central bank believes that the effects will not be significant.

Miranda remained optimistic that full-year inflation would stay at the central bank's revised target of 7 percent for this year, unless something out of the ordinary occurred.

The independent central bank has now made inflation targeting as one of its main priorities.

Concerns are rife that inflation could surpass that figure as global oil prices, currently creeping toward US$60 dollar a barrel, will likely force commodity prices and inflation up.

Many in the financial market have urged the central bank to start raising its benchmark interest rate to curb inflationary pressure, particularly at a time when the interest rate in the United States is rising.

However, Miranda assured the public that the interest rate was still attractive for investors to retain their rupiah-based portfolio.

"As of now, we see that the current interest rate is still able to offset even the expected inflation rate," Miranda argued.

The central bank's one-month benchmark rate now stands at 7.41 percent.

A relatively low interest rate is expected to make bank loans cheaper to finance corporate activities and push economic growth higher.

On the other hand, a higher interest rate environment is feared to have an adverse impact on economic growth and increase the government's burden in servicing its huge domestic debts.

The government is apparently helping the central bank's efforts to contain inflation and keep interest rates low.

Minister of Energy and Mineral Resources Purnomo Yusgiantoro assured the public recently that the government would not add a burden to the public by increasing fuel prices, at least until the end of this year.

After touring the Jatinegara and Cipinang markets in East Jakarta, Minister of Trade Mari E. Pangestu expressed her confidence that oil prices would not have a significant effect on domestic prices.

"Looking at past patterns and calculations based on current assumptions, the increase (of oil price) should not be too high," Mari, an economist at the Centre for Strategic and International Studies (CSIS), told reporters on the sidelines of her visit to the markets.

Monday's visit was Mari's first market inspection since she was appointed last week. During the visit, she met with vendors and checked the prices of staple foods.

As of Monday, the prices of staple foods in Jatinegara and Cipinang markets were relatively stable, except for certain items like beef, red onions, potatoes and cashews, which have experienced a slight increase.

"Based on our observation, the prices are relatively stable, while stocks of goods are adequate. But we will keep observing the market," said Mari.