Inflation may ease down to 5 percent by the end of the year, amid falling commodity prices and weakening demand as the world economy slumps.

“Inflation will be lower (than predicted earlier). It is forecast to decline faster to between 5 percent and 6 percent by the year’s end,” Bank Indonesia (BI) senior deputy governor Miranda S. Goeltom said Thursday.

BI previously forecast inflation to hover between 6.5 percent and 7.5 percent during 2009.

According to the Central Statistics Agency (BPS), inflation had reached as high as 11 percent last year.

The government had  forecast this year’s inflation at 6.2 percent while planning the 2009 state budget.

A lower inflation rate will give the central bank more leeway to cut its base rate, which is used as a benchmark and baseline by the banks to determine their own lending rates.

Lower lending rates will eventually reduce borrowing costs for customers, be they individuals or companies, thus providing room to stimulate the economy.

Analyst Purbaya Yudhi Sadewa of the Danareksa Research Institute said inflation might ease to between 6 percent and 6.5 percent by the year’s end, giving the central bank room to cut its rate to between 7.5 percent and 8 percent.

BI cut its rate by 50 basis points to 8.75 percent early this month as inflation slowed. BPS reported that in December inflation stabilized with deflation at a tiny 0.04 percent.

BPS chairman Rusman Heriawan has said January might see further deflation or no inflation due to fuel prices cuts, lower transportation costs and stable prices of basic foodstuffs and household items.

“January’s deflation may be bigger than December’s,” Rusman said. The agency  will officially announce the January figures on Feb.2.

Finance Minister Sri Mulyani Indrawati also said January would see deflation.

With more chance of declining interest rates, coupled with the government’s planned stimulus, m,easures Miranda said BI is still upbeat the economy will grow by a targeted 4.5 percent to 5.5 percent this year provided that the planned stimulus “goes accordingly”.

The government has prepared a Rp 27.5 trillion stimulus package for this year to shield the economy from the impact of the global economic downturn, in addition to providing huge allocations for infrastructure projects across the country.

Economists think negative impacts may hit  home hardest towards the end of the first half of 2009.

BI governor Boediono said Indonesia’s economy managed to grow by about 6 percent last year, slightly less than the 6.3 percent in 2007.

For this year, under the government infrastructure program, up to Rp 17 trillion will be spent by the Public Works Ministry, Rp 12.6 trillion by the Transportation Ministry, and Rp 4.5 trillion by the Energy and Mineral Resources Ministry.

Another Rp 3.5 trillion has been set aside for the Trade Ministry, Rp 2.8 trillion by the Finance Ministry, Rp 2.2 trillion by the Religious Affairs Ministry, Rp 1.1 trillion by the Maritime Affairs and Fisheries Mi-nistry and another Rp 1 trillion by the Education Ministry to complete the planned stimulus package.

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