BI inflation target back on track

The government’s decision to delay its plan to restrict the sales of subsidized fuels to private cars is putting the central bank’s inflation target back on the track.

Bank Indonesia Governor Darmin Nasution said in Jakarta on Monday the delay in the government’s plan to restrict the sales of the subsidized fuels helped ease concerns on stronger inflationary pressure expected in the coming months.

He said the delay created optimism that the central bank’s inflation target of between 4 and 6 percent this year could be achieved.

The central bank’s upper target is higher than the 5.3 percent projected by the government.

“The 5 plus-minus 1 percent target relies heavily on whether the subsidy limitation is going to be realized. If the fuel subsidy limitation is canceled, [headline inflation] could reach 6 percent or slightly below 6 percent for the full-year,” Darmin told reporters after a meeting with the government at BI offices in Jakarta.

Darmin said that if the government did not delay the fuel-subsidy limitation plan, headline inflation could reach 6.5 percent by year-end.

The government’s calculation indicates that the fuel-subsidy limitation would create an additional 0.3 to 0.6 percent inflation during the month the policy is implemented, Bambang Brodjonegoro, acting head of the Finance Ministry’s fiscal policy office, said at the same event.

Consumer-price growth in February slowed to 6.84 percent compared with 7.02 percent in January, allowing Bank Indonesia to avoid raising rates this month even as neighbors from Thailand to India tightened their policy to fight inflation. The central bank kept its policy rate at 6.75 percent after raising it in February by a quarter of a percentage point, the first increase since October 2008.

“Bank Indonesia may keep the rate unchanged next month,” Juniman, an economist at PT Bank Internasional Indonesia, was quoted as saying by Bloomberg.

Juniman said that March consumer prices might fall 0.05 percent from a month earlier. “The interest rate may start to rise in May as gains in oil prices will likely trigger higher food prices such as instant noodles, and prices of building materials.”

The House of Representatives approved the government’s proposal on Monday to delay the subsidized fuel sale restriction plan on the grounds that the difference between the prices of subsidized fuels and non-subsidized one were still too wide. Subsidized fuel sells for Rp 4,500 per litter while non-subsidized fuel sells for between Rp 8,700 to Rp 9,000 per liter.

The government, however, has not decided when the restriction plan would be implemented.

Central Statistics Agency (BPS) chairman Rusman Heriawan said it would be best for the fuel-subsidy limitation to be implemented in May at the latest to minimize the negative impacts on full-year inflation.

“It’s either now or next year. My suggestion is that now is the best time to make a decision. Whatever option the government takes, inflation will occur. So if the government cannot implement it in February, March and April, it has to be ready to delay it throughout 2011 because soon Ramadhan and the new academic year commences. The situation will worsen,” Rusman said at the BI offices on Monday.

Emerging market nations around the world, including Indonesia, are currently faced with inflation problems as food and oil prices surge, posing a threat to the people’s purchasing power and further economic growth.

Coordinating Economic Minister Hatta Rajasa and Darmin, however, expected inflationary pressures to ease in the next few months because harvest season would lower food prices, which are the main push factor of inflation.

“We believe that in the months of March to April, even in May, inflation will not be too worrying,” Darmin said.

Hatta added that the latest reports showed that prices had tended to decrease over the last few weeks, especially those produced in the country such as rice.