Inflation easing means BI rate goes down, or not?

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Tue, 12/02/2008 10:43 AM  |  Business

Inflation further slowed in November, according to the Central Statistics Agency (BPS), providing the central bank something to cheer about when it meets later this week to decide its interest rate policy.

Bank Indonesia is yet to join its peers worldwide to cut rates to boost recession-hit economies.

Inflation rose 11.68 percent from a year earlier, after reaching 11.77 percent in October, BPS chairman Rusman Heriawan told a press conference Monday. Meanwhile, it rose only 0.12 percent from September, the year's lowest month-to-month inflation.

Of 66 cities nationwide surveyed by BPS, 27 had inflation and 39 had deflation.

The price of staple foods deflated by 0.67 percent, "the first time throughout the year", as well as the price of transportation, communications and the financial services sector, which deflated by 0.31 percent, Rusman said.

"There were no demand pressure in November. Demand on clothing and housing dropped drastically, while world commodity prices kept falling," he said, adding that Indonesia had yet to feel the impact of imported inflation caused by the depreciating rate of the rupiah against the U.S. dollar.

The rupiah was traded at 12,285 per dollar at 3:32 p.m. Monday in Jakarta, Bloomberg reported. The currency has fallen 25.6 percent since late June, the worst performance in Asia after the South Korean won.

Standard Chartered Bank senior economist Fauzi Ichsan said the central bank would maintain its interest rate due to the fluctuating rate of the rupiah against the dollar.

"The rupiah is still unstable."

Fauzi estimated inflation would reach 12 percent by the year's end, a basis for the central bank to probably hold the rate at the current level in 2008, before starting to cut it next year.

The central bank kept its interest rate at 9.5 percent in November, after raising it for six straight months from 8 percent in May.

Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said that with the current inflation rate, the central bank even had room to cut its rate to stimulate the real sector.

"There is room to cut the interest rate, particularly after central banks worldwide have cut interest rates," he said.

The central bank has said it will cut its rate when inflation has slowed to an "unalarming level."

Purbaya estimated inflation would slow to a single digit figure next year, as expected by the central bank. It forecasts an inflation rate of between 6.5 percent and 7.5 percent in 2009, easing from between 11.5 percent and 12.5 percent this year.

BPS said December's inflation would likely be below 1 percent, lower than the 1.1 percent recorded in December 2007, with a drop in subsidized gasoline price being the main contributor to improved figures.

Starting Dec. 1, the price of subsidized Premium gasoline is Rp 5,500 (44.53 U.S. cents) per liter, a Rp 500 cut from the previous price of Rp 6,000.

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