B

ank Indonesia's (BI) interest rate has remained at 5.75 percent for 15 consecutive months, but states it 'will not hesitate to adjust monetary policy if needed' in response to possible inflation from the impending fuel price adjustment.

BI will remain vigilant over rising inflationary pressure in the economy, the central bank said on Tuesday in a statement released after its board of governors meeting, the last for Governor Darmin Nasution, whose term will end on May 23.

In the last two months, inflation has soared above BI's target of 5.5 percent, its highest level in two years of 5.9 percent in March and 5.57 in April.

Andry Asmoro, an economist with state-run Bank Mandiri, said that BI had made the correct decision by keeping its key interest rate unchanged at 5.75 percent, despite surging inflationary pressure.

'Hiking the rate now will not solve our inflation problems,' he said on Tuesday, citing low core inflation ' a measurement of the real inflation trend that excludes prices of volatile foods and government-controlled commodities ' over the last few months. While inflation in April was still relatively high at 5.57 percent, core inflation stood at only 4.12 percent, declining from 4.21 percent a month earlier.

'Our current inflation was not demand-driven, but was caused by temporary price shocks in foods. It is different to inflation sparked by a fuel price hike,' Asmoro explained.

Nevertheless, the central bank is expected to face further inflationary pressures stemming from the imminent fuel price hike, a situation that might force BI to perform monetary tightening in the economy, analysts say.

This week, the government announced it planned to increase the price of subsidized Premium gasoline and diesel fuel by 44 percent and 22 percent, respectively, to Rp 6,500 (67 US cents) and Rp 5,500 from their current level of Rp 4,500.

A fuel price hike at such magnitude was unexpected, and would be 'a big upside surprise and a huge political gamble' ahead of the 2014 elections, Credit Suisse economist Santitarn Sathirathai said.

The scenario would drive up the inflation rate close to 8 percent by the end of this year, he predicted.

Surging inflation would consequently force the central bank to perform monetary tightening, but Sathirathai doubted that the policy response would come in the form of adjustment in BI's rate.

'The most likely response from the dovish central bank is to push up the Fasbi [overnight deposit facility rate] moderately and let the rupiah depreciate gradually,' he said, forecasting the central bank to eventually allow the rupiah to trade below 10,000 per US dollar.

Stalling global economic recovery forced central banks in the Asia Pacific region to turn dovish ' a term coined to describe a central bank that prioritizes in supporting growth rather than managing inflation through resisting hiking rates, or even cutting rates.

This month, central banks in India, South Korea and Australia cut their rates by 25 basis points, as their countries' gross domestic product (GDP) growth had been under pressure from weak exports.

Indonesia was not immune from the contraction in global exports, posting its slowest economic growth in two and a half years of 6.02 percent in the first quarter this year.

The situation currently faced by BI ' a high inflation risk coupled with slowing growth ' is a tricky combination for monetary policy.

'Given the government's focus on keeping investment robust to boost GDP growth, the weakness in investment will likely limit the room for policy rate hikes by the central bank,' he said. The rupiah was little changed at 9,739 per dollar as of 3:03 p.m. on Tuesday, according to prices from local banks compiled by Bloomberg. The currency is the worst performing currency in Asia after the yen in the past year.