Boediono optimistic about this year's inflation target

Boediono optimistic about this year's inflation target

Rendi A. Witular and Dadan Wijaksana, Jakarta

Minister of Finance Boediono said on Wednesday the inflation
rate this year would likely be in line with the government's
projections, despite fears in the financial market the current
decline in the rupiah could fuel inflation.

"Based on our recent study with Bank Indonesia, the inflation
rate target this year will remain on track at 6.5 percent. It can
even go lower than that," said Boediono during a meeting with
House of Representatives Commission IX for finance.

Boediono said his optimism was based on the assumption that
the rupiah's fall was only short-lived as the dollar would
eventually weaken due to the large current account and trade
deficits in the U.S.

"Market players are still worried about the rupiah due to the
global psychological effect. But one thing that they missed in
their calculations is that the dollar is still vulnerable to
depreciation due to the massive deficit in the United States," he
said.

He said inflation here could even decline to 6 percent on
lower food prices.

The rupiah has been under severe pressure over the past few
weeks due to a combination of domestic and overseas factors such
as a possible hike in U.S. interest rates, soaring oil prices and
political tension ahead of the July 5 presidential election.
The rupiah fell to a 19-month low of 9,275 on Wednesday.

The sharp decline in the rupiah has created fears of rising
inflationary pressure. A lower rupiah increases the cost of
production because of the dependence on imported raw materials.
This in turn push prices up.

Worries over inflation emerged earlier this month when the
inflation rate in April accelerated to 5.9 percent from 5.1
percent the previous month.

The government was forced to cancel a planned Rp 3.5 trillion
bond issue on Tuesday as investors demanded overly high yields
due to the rupiah's woes and inflation worries.

Bank Internasional Indonesia's chief economist, Ferry
Latuhihin, shared Boediono's optimism, saying inflation this year
would mainly be driven by an increase in base money rather than
cost-push inflation, as happened during the early period of the
late 1990s financial crisis.

"The inflation rate is likely on track despite all the issues,
because unlike in the 1997 financial crisis, the recent decline
in the rupiah is also driven by an excess of base money," Ferry
said.

According to Ferry, base money increased by an average of
14.92 percent in the first quarter of this year from 7.9 percent
in the same period last year.

Boediono said that to help stem the rupiah's fall, the
government and the central bank should cooperate in order to
avoid any miscommunication between the two institutions in taking
measures related to monetary and fiscal policies.

"Cooperation is needed between the government and the central
bank to prevent any negative signals or confusion in the market
due to a lack of coordination between the two institutions," he
said.

Elsewhere, Bank Indonesia senior deputy governor Anwar
Nasution said that despite the rupiah's decline and the widely
expected hike in U.S. interest rates, the central bank had no
plans as yet to raise its benchmark interest rate.

"If the Federal Reserve increases interest rates by only 20 to
25 basis points, Bank Indonesia will not increase domestic
rates," Anwar Nasution said.

A domestic real interest rate of about 2 percent is still
relatively higher than rates in other parts of the region.