Inflation troubles Indo central bank

Hartadi A. Sarwono, BI deputy governor, said prices for global commodities, such as for rice and crude palm oil, would increase due to climatic factors.

He said full-year inflation this year may rise to 6.5 percent from the 2.7 percent for last year, and pressure from higher food and commodities prices may push the figure even higher next year.

The Central Bureau of Statistics (BPS) said annualized inflation had already reached 6.33 percent year-on-year in November. Core inflation, measuring consumer prices excluding volatile items such as food, stood at 4.31 percent over the same period.

'We will not hesitate to raise rates if the core inflation exceeds 5 percent," Hartadi said.

He was referring to the central bank's benchmark interest rate, which has been at a record-low 6.5 percent since August 2009. The rate is among the highest in the region.

Bank Indonesia has been reluctant to raise rates on concerns that investors seeking high returns in emerging economies such as Indonesia, would flood the country's markets, triggering inflation and economic volatility.

Coordinating Minister for the Economy Hatta Rajasa said the government would maintain its inflation target for next year at 4-6 percent while analysts estimate the figure at 6.3 percent, as bad weather could hamper the rice harvest and push commodities prices up. A planned cut of fuel subsidies could also increase prices of essentials across the board.

Hartadi said the bank would "coordinate with the government to ensure adequate supply of [key] commodities," to keep high prices down.

Hatta promised that supplies of commodities, especially essentials, would "remain adequate."

Widjaya Adi, a researcher at the Indonesian Institute of Sciences (LIPI), said inflation could hit 6.3 percent in 2011 due to rising prices for rice, electricity and fuel.

"This will force Bank Indonesia to raise its benchmark rate to 7 percent next year," he said.