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BI rate can stay at 7.5% despite fuel price hike
Bank Indonesia (BI) has signaled that the current benchmark interest rate in the economy may already be sufficient to counter a potential spike in inflation due to the adjustment of fuel prices
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ank Indonesia (BI) has signaled that the current benchmark interest rate in the economy may already be sufficient to counter a potential spike in inflation due to the adjustment of fuel prices.
President-elect Joko 'Jokowi' Widodo's team has declared its commitment to increasing the price of subsidized Premium gasoline by between Rp 1,000 and Rp 3,000 per liter, from the current price of Rp 6,500 (US 54 cents) per liter, as early as November this year.
'If subsidized fuel is increased by Rp 2,000 per liter, the additional inflationary effect may stand at around 2.2 to 2.3 percent from our inflation forecast next year,' BI Senior Deputy Governor Mirza Adityaswara told reporters on Monday night in Jakarta.
'The current BI rate of 7.5 percent may still be sufficient in that condition,' he added.
While a potential adjustment in fuel prices may drive up price levels, Indonesia already has a wide real interest rate gap in the economy, a situation that has boosted the returns of investing in rupiah bonds and has attracted foreign investors.
The benchmark BI rate stands at 7.5 percent while the country's inflation in August fell to 3.99 percent, the lowest in almost two years.
While inflation has remained well-anchored, the same cannot be said for the rupiah, which has continued to remain under pressure this year as high oil imports have contributed to the widening current-account deficit.
The central bank has been an ardent advocate of adjusting the fuel price to put the brakes on the country's too-high oil imports.
Last month, BI Governor Agus Martowardojo warned that if uncertainty over the fuel subsidy reforms was prolonged, he might be forced to carry out stronger monetary tightening that could cause the economy to suffer a 'hard landing'.
- At 7.5 percent, the BI rate is seen as sufficient
- Next government may need increase fuel price or else risk monetary tightening from BI
- Jokowi vows to crack down on oil mafia by setting up task force
The market has a perception that Jokowi must increase the fuel price early in his term to avoid any unnecessary political hassle that could occur if he dithers over the issue, said David E. Sumual, the chief economist of Bank Central Asia (BCA).
'This [the fuel price hike] is a potential political 'banana skin' that can worsen Indonesia's macro indicators in the short-run, but it should improve investor confidence and give Jokowi much-needed fiscal space to implement his programs,' he wrote in a research note released on Tuesday.
Besides declaring its commitment to increasing the price of subsidized fuel, the transition team of Jokowi has also vowed to crack down on the so-called 'oil mafia' that is believed to have cost the state trillions of rupiah and hindered efforts to attain national energy sovereignty.
The next government would establish a specific task force to eradicate oil and gas mafias without exception and with an effective deterrent effect that would discourage the emergence of new mafias, Hasto Kristiyanto, a deputy for Jokowi's transition team, said in a statement released on Tuesday.
Jokowi's government will also freeze the operation of Pertamina Trading Energy Limited (Petral), a company responsible for managing Indonesia's oil imports via overseas oil trading, according to Hasto.
Petral's operations are believed to be marred with corruption. In 2012, the company was reported to the Corruption Eradication Commission (KPK).
