Indonesian inflation to push up interest rates-c.bank

By Adriana Nina Kusuma and Harry Suhartono


JAKARTA, May 22 (Reuters) - Fuel price rises planned by the government could push Indonesia's inflation rate above 12 percent this year and interest rates would have to go up to tackle it, a senior central banker said on Thursday.
Indonesia's finance minister said on Wednesday 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.
Asked about the benchmark BI interest rate BIPG, Hartadi Sarwono, deputy governor of Bank Indonesia, said: "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."
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.
"Our expectation is that a 50 basis point hike at the June 5 meeting is more likely than 25 basis points and we expect inflation to remain in the 11-12 percent range for the remainder of the year," said Claudio Piron, a Singapore-based currency strategist at JPMorgan Chase.
He expected the rupiah, currently trading around 9,320 per dollar, to come under pressure until a rate rise materialised. "We expect the 9,500 level to hold so long as a rate hike on June 5 is delivered," he added.
Christy Tan, a currency strategist at Bank of America, said she thought the BI rate could reach 9.25 percent by the end of 2008.
DOUBLE-DIGIT INFLATION
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.
In October 2005, the administration of President Susilo Bambang Yudhoyono more than doubled subsidised fuel prices, pushing the annual inflation rate above 18 percent and rocking the automotive, banking and manufacturing sectors.
The country ended 2005 with an inflation rate of 17.11 percent.
Price rises are a sensitive issue in Indonesia, where millions live on less than $2 a day and have had to cope with increases in the price of rice, cooking oil and now fuel.
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.
Indonesia, Asia's only OPEC member but Southeast Asia's top diesel and gasoline importer, provides heavy subsidies for fuel to shield consumers from the global price of crude oil, which hit a record above $135 a barrel on Thursday, way above an Indonesian budget assumption of $95 a barrel.
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. (Additional reporting by Muhamad Al Azhari, Andreas Ismar and Tyagita Silka; Editing by Sugita Katyal and Alan Raybould)

Quoted from Reuters

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