Inflation at three-year low, SBI to drop

Evi Mariani, The Jakarta Post, Jakarta

Inflation in June increased by only 6.62 percent compared to the level in the same month last year, which the Central Statistics Agency (BPS) said was the lowest year-on-year rate in three years.

The low inflation provides greater room for Bank Indonesia to further cut its benchmark interest rate, analysts said.

BPS said on Tuesday that when compared to the previous month, inflation -- as measured by the consumer price index -- in June rose slightly by 0.09 percent due to higher prices of goods and services such as food, beverages, cigarettes, clothing and rising costs of housing, health, transportation and telecommunications.

Citibank economist Anton Gunawan told The Jakarta Post that the June inflation rate was "surprisingly good", as Citibank had previously forecast the rate would reach 6.8 percent.

Some economists have said that if inflation could be maintained at below 7 percent, the benchmark rate on one-month Bank Indonesia SBI promissory notes could go down to a new six- year low of around 8 percent.

"The rate would allow Bank Indonesia to further cut the SBI rate to as low as 8 percent, and even lower," said Anton.

The SBI rate has been steadily declining during the past year from over 17 percent earlier last year to around 9.53 percent now. This has been possible due to a stronger rupiah and a relatively low inflation.

Bank Indonesia deputy governor Aslim Tadjudin said on Tuesday he expected the SBI rate to go down to below 9 percent this week amid the healthy inflation environment.

The lower SBI rate would help ease the government's burden in servicing its huge domestic debts, as well as enabling banks to lower their lending rates and hopefully spur new loans from the corporate sector. Increasing loans to the corporate sector would in turn help push the economy upward.

As macroeconomic indicators such as the rupiah, inflation and SBI rate appear to be in a much better condition than those assumed in the 2003 state budget, there is hope that this year's economic growth could be higher than the 4 percent government projection.

"Theoretically, with inflation and SBI rates doing so well, the GDP (gross domestic product) growth will also go higher than expected," said Anton.

But he was quick to add that such a scenario may not materialize as bank lending rates remained high at around 17-18 percent due to various other problems that have prevented banks from dropping their rates. This, in turn, may limit lending to the corporate sector.

"The link between the economic data and the real sector is the banking industry. Without some improvement in the industry, the economy will remain relatively unhealthy," he said.

"So, I'm not revising Citibank's GDP growth forecast of 3.9 percent this year. I think that it will be good enough for the country if it can reach the 3.9 percent forecast," he said.