Central bank forecasts 1999 inflation at 2%

JAKARTA (JP): Bank Indonesia is forecasting 2 percent inflation throughout 1999 if the domestic political situation improves following the Oct. 20 presidential election.

"The board of governors believes pressure on prices will remain low and inflation could be checked at 2 percent in 1999," the central bank said in a statement on Wednesday.

Bank Indonesia earlier forecast inflation for the year would be around 5 percent.

Bank Indonesia said prices currently were stable and under control, as reflected by the 0.68 percent deflation in September, the seventh consecutive month of deflation.

The central bureau of statistics said recently September's 0.68 percent deflation sent the annualized inflation level down to 1.25 percent.

Indonesia suffered hyperinflation of more than 77 percent last year as the economic crisis deepened.

Bank Indonesia said the deflation over the past seven months was the result of supply outweighing demand.

The central bank said increased production was seen in the agriculture and mining sectors and the processing industry, while demand remained low because of weak household purchasing power and the ailing banking sector was still not providing significant financing for new investments.

Bank Indonesia said the consolidation process in the banking sector and the slow restructuring of the real sector were the primary reasons behind the low level of investment by the private sector.

The bank also pointed to its tight monetary policy during the second and third quarters of 1998 as a factor behind the still lagging pace of private investment.

Bank Indonesia also said that if the postelection political situation improved, 1999 economic growth could reach zero percent, compared to last year's 13.68 percent contraction.

"But if the domestic social and political situation is not as conducive as expected, the board of governors projects the economy will contract by 1 percent, accompanied by inflation of between 2 percent and 4 percent," the statement said.

The country has been plagued recently by bloody riots and student demonstrations, as well as a banking scandal which allegedly involves people close to the President.

The rupiah took a recent hit from the unrest and the banking scandal.

However, Bank Indonesia said the weakening of the rupiah was temporary because it was not followed by an increase in the "premium swap".

"This indicates that sentiment on the rupiah is still strong," the bank said.

The rupiah ended higher at 7,745 against the U.S. dollar on Wednesday, from 7,780 the previous day. The currency was above the 8,000 level last week, a dramatic fall from its 6,500 level before the Bank Bali scandal was exposed and the problems in East Timor erupted.

The central bank said the relatively low inflation and a stable rupiah would bring the benchmark interest rate on its one- month SBI promissory note to 10 percent by the end of 1999.

Bank Indonesia, however, warned that if the domestic political situation deteriorated, the one-month SBI rate would increase to as high as 12 percent.

The one-month SBI rate slightly increased for the third straight week to 13.03 percent on Wednesday, from 13 percent the previous week. (rei)