The central bank held its key rate at 6.5 percent for the fifth straight month on Wednesday, forecasting no inflationary pressures within the first half of this year.
Bank Indonesia (BI) cut its rate by 300 basis points from 9.5 percent in December 2008 to 6.5 percent in August 2009 to stimulate the economy which had been slowed by the global downturn. Last year’s inflation — at a 10-year low 2.78 percent — gave BI room for rate cuts.
Acting BI governor Darmin Nasution said in a press conference at the State Palace that the 6.5 percent BI rate would be “conducive” to support economic recovery, financial stability and bank intermediation. He added that inflation this year would be in line with BI’s estimate of between 4 percent and 6 percent.
“The board of governors sees that the balance of risk of inflationary pressures has yet to appear at least in the first half of 2010,” he said.
Inflation is a main threat to the economy, which is 60 percent driven by people’s purchasing power.
Finance Minister Sri Mulyani Indrawati said inflation could be triggered by increases in the price of rice and other goods because of higher demand resulting from an improving economy. She said last month the government would delay raising electricity base tariffs, but did not specify for how long.
“What needs to be watched is the price of rice until April, before the harvest season,” she said.
Rusman Heriawan, head of the Central Statistics Agency (BPS), warned the government to anticipate the rising prices of rice and sugar as both had risen about 4 percent in the past week.
“These will be a problem. Although we can import them, but if the prices are higher than the domestic ones this is also a problem. We need to be careful in managing domestic prices,” he said.
Coordinating Economic Minister Hatta Rajasa said the government would improve infrastructure to ease logistical costs, since the latter tended to cause price inflation.
The Finance Ministry estimated that Indonesia’s economy grew by 4.3 percent last year. The government expects the national economy to expand 5.5 percent in 2010 as the global recovery starts to recover.
Deputy Bank Indonesia Governor Hartadi A. Sarwono said supply should be increased to adjust to rising demand to prevent inflation.
Bank Danamon economist Helmi Arman said inflation this year might reach 5.3 percent, instead of 6.7 percent as predicted earlier. Therefore, he said, BI might start to raise its policy rate later than previously predicted, possibly early in the second quarter of 2010.
