Double-digit inflation until Oct. 2006: BI

The Jakarta Post, Jakarta

The central bank is predicting inflation in the country will remain in double digits until next year's third quarter -- at the earliest.

Bank Indonesia (BI) Governor Burhanuddin Abdullah said inflation would ease down afterwards, returning to single digits as the year wrapped up.

"There is an indication that inflation during next year's fourth quarter will slow down to between 7 percent and 8 percent," he said in a seminar on the economy on Wednesday.

Burhanuddin did not elaborate further on what would cause the easing down.

Separately, an optimistic Minister of Finance Jusuf Anwar said the monthly inflation rate during this year's remaining months of November and December would likely be contained at below 1 percent month-on-month, although the full-year inflation for 2005 would probably still end up in double-digits.

"But at least the worst is now over," he said. "And we will continue to improve the situation step by step."

State Minister for National Development Planning Sri Mulyani had earlier said that the government would work hard to stabilize prices and the rupiah to bring the currently high inflation down by March next year, and try to meet the year's inflation target within the remaining three quarters.

The government was expecting a full-year inflation of 8.6 percent for 2006, and 8 percent for this year.

However, inflation has already skyrocketed to 17.89 percent in October, after the government more than doubled the average price of fuel that month.

The higher-than-expected October inflation had forced the central bank to continue raising its benchmark BI Rate as well, to 12.25 percent -- its fifth rate hike since July.

BI has been raising its key rate to support the rupiah, which had been slumping as soaring global oil prices bloated the cost of the country's fuel subsidies and hurt confidence in the government.

Before October inflation was already on the rise, shooting up 8.81 percent in March when the government first raised fuel prices by an average of 29 percent. Inflation only eased down for two months, before picking up pace again in July.

The combination of higher inflation and interest rates are beginning to put pressure on the growth prospects of Indonesia's consumption-driven economy, as the public's purchasing power weakens and consumer and commercial loans become more expensive. The consensus among analysts puts the growth at 5.7 percent for this year, lower than the government's 6 percent target, with interest rates predicted to stay high until at least next year's second quarter.

Bank Mandiri chief economist Martin Panggabean said the ongoing high inflation and interest rates would likely constrain growth until later next year.

Martin saw Indonesia's economy being able to expand only between 4 percent and 4.5 percent during this year's final quarter, citing a seasonal slowdown in construction projects.

For 2006, Martin saw the economy growing by a moderate 5 percent.

"Indonesia's economy should be better next year, but only if inflation and interest rates decrease within the year's first quarter," he said.

How this would occur depended on the central bank's policies to address the situation, he said.