U.S. rate hike could hurtRI economy

Rendi A. Witular, The Jakarta Post/Jakarta

Higher interest-rate environment in the United States is likely to put further pressure on the local economy next year, amid already high inflationary pressure at home following the fuel price hike and the rupiah's shaky footing, says Vice President Jusuf Kalla.

Both would most likely drive domestic interest rates up and could eventually put a brake on loan expansion and business activities, Jusuf said on Friday.

"The government will seriously focus on easing inflationary pressure next year at a time when inflation in the United States could trigger higher interest rates there," said Kalla after Friday prayers.

"Even a rumor over another possible hike in the U.S. interest rates will send a 'fever' to other countries. Whatever happens in the U.S. economy will not only affect Indonesia but also other countries," he said.

As reported by the media, there is a strong chance the U.S. Federal Reserve will raise interest rates further as inflation is now seen as a threat to the world's largest economy after recent twin hurricane disasters.

At present, the federal funds rate stands at 3.75 percent, with predictions that it could rise to a level of 4.5 percent some time next year.

Consequently, Bank Indonesia would be put under more pressure to continue its moves to raise its benchmark interest rates, to keep investors attracted to rupiah-based portfolios.

Kalla said the government and the central bank would take appropriate measures to create a conducive business environment in order to prevent investors from converting their rupiah portfolio to U.S. dollars, which could severely hurt the local currency.

The former businessman, however, did not elaborate on the measures needed to keep the rupiah stable and inflation in check.

At present, the central bank's reference interest rate stands at 11 percent, with on-year September inflation standing at 9.06 percent.

Government officials have projected full-year inflation is likely to reach between 11 percent and 12 percent as a result of a steep rise in the prices of subsidized fuels by the end of the year.

For next year however, the government remains upbeat that inflation could hover at between 7 percent and 8 percent, not taking into account the impact of a power-rate hike and other possible increases as a result of the higher fuel prices.