BI raises key interest rate

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Wed, 05/07/2008 12:54 AM  |  Headlines

Indonesia's central bank has raised its benchmark interest rate for the first time in more than two years amid expectations of rising inflation following the government's announced intention to raise fuel prices.

"Bank Indonesia (BI) raised its interest rate by 25 basis points from 8 percent to 8.25 percent after considering stronger inflationary pressures. We have factored in plans of the fuel prices hike," BI Deputy Governor Miranda Swaray Goeltom said here Tuesday.

BI had maintained its rate of 8 percent since December last year. It last raised its rate to 12.75 percent in December 2005.

Standard Chartered chief economist Fauzi Ichsan said the decision came as a surprise.

"BI raised its interest rate to control inflation expectations due to a possible rise of 20 percent to 30 percent in fuel prices."

Fauzi said that by increasing its rate, BI signaled to the market that inflation was under control.

With a 30 percent rise in fuel prices, Fauzi predicted inflation would reach between 10 percent and 11 percent by the end of the year. Last year, inflation reached 6.59 percent.

In April, year-on-year inflation was 8.96 percent, with inflation between January and April reaching 4.01 percent.

Miranda said the government's decision to hike fuel prices came at the right moment. "The government's plan to reduce fuel subsidies that burden the state budget is noteworthy."

According to BI, inflationary pressures have grown because people assumed the government would eventually raise fuel prices.

The government plans to raise fuel prices to an "affordable" level to anticipate burgeoning fuel subsidies threatening state budget sustainability.

Under the revised 2008 state budget, the government allocated Rp 126.82 trillion (US$13.77 billion) in fuel subsidies, about 12 percent of the total state expenditure.

Based on early drafts of the plan by economic ministers, the government may increase the price of subsidized premium gasoline from Rp 4,500 to Rp 6,000, diesel from Rp 4,300 to Rp 5,500 and kerosene from Rp 2,000 to Rp 2,500.

Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said rising fuel prices would add 2 percent to the inflation rate this year, while the Central Statistics Agency said the rise would add almost 1 percent.

Finance Minister Sri Mulyani Indrawati predicted Tuesday that economic growth would decline from 6.4 percent to 6 percent "in the midst of a difficult situation this year coming from the rise in commodity prices that has affected people's purchasing power".

Sri Mulyani said inflation might reach between 8.5 percent and 9.5 percent at the end of 2008, far higher than the government's target of 6.5 percent.

Miranda said BI would continue monitoring inflationary pressures and coordinating with the government to control inflation.

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