Indonesia’s central bank moved to increase its benchmark short-term interest rate after inflation data indicated south-east Asia’s largest economy might suffer a bigger than expected shock from efforts to deal with high oil prices.
President Susilo Bambang Yudhoyono on October 1 increased fixed fuel prices by an average 126 per cent in order to rein in government subsidies that were ballooning as a result of soaring global crude prices. But data released yesterday showed consumer prices rose by an average 17.9 per cent in October as a result of the increase, compared with the 13.5 per cent estimate of market economists.
The data prompted Bank Indonesia to move quickly to raise its benchmark one-month target rate by 125 basis points to 12.25 per cent in its most aggressive tightening since the 1997-98 Asian financial crisis.
Bank Indonesia has tightened its key rate by 350 basis points since the rupiah touched four-year lows in August owing to investors’ concerns about monetary policy and government delays over fuel prices.
Investors have taken that as a sign the central bank again has monetary policy firmly in control. “The hawks seem to be calling the shots” at Bank Indonesia, said Fauzi Ichsan, Standard Chartered’s lead economist in Jakarta.
Mr Ichsan said the question now, however, was whether the October 1 fuel price increase, lauded at the time for its boldness, might have been too much for the economy to absorb.
That is a sensitive topic for Mr Yudhoyono, who continues to weather domestic criticism about the size of the increase and its impact on the country’s poor. A worse or longer than expected impact on the economy could hurt his still-buoyant popularity.
Addressing critics during a visit to the eastern Indonesian island of Lombok on Monday, the retired general said he and his ministers had thought the move through carefully.
“We ruminated, we pondered and prayed, and eventually Allah gave me the decision and policy that is good for this country, for all of us and for the future,” he was reported as saying by the state-owned Antara news agency.
Aburizal Bakrie, the former tycoon turned chief economic minister, told reporters yesterday that October’s surge in inflation was a “one-off” and would not derail the economy which the government has predicted will grow by 6 per cent this year.
Inflation would fall “drastically” in November and December, Mr Bakrie predicted, and settle at about 7-8 per cent in 2006.
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