Urip Hudiono, Jakarta – Hopes of a breathing space for the economy in the form of easing interest rates may prove to be unfounded, with the central bank saying inflationary pressures continue to remain a problem, despite the rupiah's recent gains.
"Inflationary pressures are still strong, so I think our monetary policy will have to remain tight as well," Bank Indonesian (BI) Governor Burhanuddin Abdullah told reporters on Friday.
The inflationary pressures, Burhanuddin said, included those likely to come from probable increases later this year in electricity prices, minimum wages and civil service salaries, as well as those resulting from the recent surge in the price of rice.
This is despite the fact that the rupiah has risen to as high as Rp 9,200 against the US dollar, which Burhanuddin acknowledged would contribute to lower import-related inflationary pressures.
The rupiah closed slightly higher Friday against the greenback at Rp 9,310, as compared to Thursday's close of Rp 9,345, after reaching an intraday low of Rp 9,350. A stronger rupiah makes imports cheaper for Indonesia's consumption-driven economy, but has the potential to hurt exporters.
Burhanuddin declined, however, to say whether BI was considering hiking its key interest rate pending the central bank's Board of Governors meeting on Feb. 7.
Hopes of lower interest rates rose when the central bank left its BI Rate unchanged at 12.75 percent in January after prices eased by 0.04 percent in December, leaving full-year inflation standing at 17.11 percent.
On-year inflation reached a six-year high of 18.38 percent in October after the government hiked fuel prices for the second time last year, forcing BI to further raise its rate to contain inflation.
High inflation erodes people's purchasing power, while higher interest rates make borrowing for new investments more expensive – both of which lead to lower economic growth.
BI's latest assessment says that Indonesia's economy expanded by between only 4 and 4.5 percent during last year's final quarter, slower than the 5.3 percent expansion seen in the third quarter. Last year's overall growth came in at between 5.3 and 5.6 percent, as compared to 5.13 percent in 2004.
The central bank has said it may gradually begin to lower interest rates by this year's second semester – or even sooner – as inflation slows down and the tight global monetary cycle comes to an end.
The US Federal Reserve, however, raised it benchmark rate this week to 4.5 percent from 4.25 percent earlier. Meanwhile, monthly inflation in Indonesia stood at 1.36 percent in January, the Central Statistics Agency (BPS) reported, due particularly to the recent surge in the price of rice.
The government is expecting full-year inflation to come in at 8 percent in 2006, with BI allowing a 1 percent plus-minus range. This forecast has already factored in possible power price hikes, but only up to a maximum of 30 percent.