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May 23, 2008

Fuel price hike will push interest rate above 12%

Hartadi Sarwono, Deputy Governor of Bank Indonesia warned Thursday that the country’s inflation rate will go up above 12 percent this year in the wake of the rise in fuel price rises planned by the government, reported Reuters.

“An increase in a flexible manner must be done as we are dealing with inflation which could top 12 percent by the year-end, so there must be an adjustment,” Reuters quoted Sarwono as saying.
On Wednesday, Indonesia's finance minister said that plans to raise fuel prices by an average of 28.7 percent were "largely final" and that the timetable for the rise would be unveiled by the president on Friday.

The central bank raised the rate on May 6 to 8.25 percent after inflation hit a 19-month high of 8.96 percent in April and analysts said they expected a further increase at the next monetary policy meeting.

The head of the central statistics agency said annual inflation could top 10 percent in May, irrespective of what happened to state-controlled fuel prices.

"In May, even without the increase in fuel prices, year-on-year inflation could reach above 10 percent. In June, if the government announces the planned fuel price increase, it could be even higher," Rusman Heriawan told reporters. "In May, inflationary pressure will come from food prices," he added.

At a news conference given by Finance Minister Sri Mulyani Indrawati on Wednesday, a ministry slide indicated inflation would spike to 11.96 percent in the first month after the fuel price rise.

President Yudhoyono had been reluctant to approve more fuel price rises with presidential and parliamentary elections next year, but the government has been backed into a corner as soaring international oil prices have increased subsidies and stretched the state budget.

The government has allocated 126.8 trillion rupiah ($13.7 billion) for fuel subsidies in this year's budget, about 13 percent of total government spending of 989.5 trillion rupiah.

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