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NEWS UPDATES Asean Affairs        21  February 2011

Experts weigh in on Indo economic policy

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Economists question whether Bank Indonesia and fiscal authorities can keep inflation down this year amid high crude oil prices, volatile domestic food prices and a plan to bar private cars from using subsidized fuel.

“The government and Bank Indonesia are taking a whole arsenal of measures to try to deal with inflation,” Senior International Monetary Fund resident representative Milan Zavadjil said. “If they persist with this multi-pronged approach, I think they have a good chance of achieving the target,” he said.

President Susilo Bambang Yudhoyono has pledged his administration will spare no effort to slow food price increases, including waiving import duties and value-added taxes for rice and soybeans. The government has also suggested households grow food such as chilies, which have surged five-fold in cost during the last year.

Bank Indonesia raised its benchmark interest rate by 25 points to 6.75 percent on Feb. 4. It had kept the rate steady at 6.5 percent since April 2009 in an effort to spur economic growth.

Inflation in Southeast Asia’s largest economy rose to 7.02 percent in January from a year earlier after a 6.96 percent gain in December. The central bank expects inflation to stay between 4 percent and 6 percent this year, allowing the economy to grow between 6 percent and 6.5 percent.

Some economists aren’t as sanguine about the future, though. Wellian Wiranto, an HSBC economist, said Indonesia’s combined efforts may not be enough to cool inflation.

“Global headlines have been screaming, ‘Oil above $100,’ and the World Bank chief has chipped in with sound bites like, ‘Food prices hitting dangerous levels.’ Domestic ones, too, have been about high inflation at the start of the month and prices at the pump going up in a few months’ time because of subsidy changes. You go home to hear complaints about, ‘Even if less so now, rice and chili are still expensive,’ and, driven by soybean scarcity, ‘Tofu and tempe are now crazy too!’ ” he said in a report.

Wellian said Indonesia is still vulnerable to global commodity price volatility when it comes to imported items such as wheat and soybean.

“Given all these, it would have been more surprising to see inflation expectations not going up in Indonesia. Indeed, they have been heading northward,” he said.

HSBC expects a 25-basis point hike at the next Bank Indonesia policy meeting on March 4, and a similar rise the following month.

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