Bank Indonesia to Manage Inflation as Costlier Fuel Looms

By Yudith Ho and Karl Lester M. Yap

Photographer: Dadang Tri/Bloomberg

Perry Warjiyo, deputy governor of Bank Indonesia.

Bank Indonesia will seek to ensure inflation remains manageable and any impact from an impending fuel-price increase is temporary, central bank Deputy Governor Perry Warjiyo said.
“It will depend on how much fuel prices will be raised,” Warjiyo said in an interview in Jakarta today, when asked if the central bank will raise interest rates when subsidized fuel prices are increased. Policy makers are due to decide on the benchmark rate on Nov. 13.
Finance Minister Bambang Brodjonegoro said this week the government will probably raise the prices before the end of the year to trim subsidies and create more fiscal space. President Joko Widodo, whose government is still weighing the size and timing of the change, has said he
will reduce gasoline and diesel subsidies gradually to free up funds to help the poor, build infrastructure and support farmers, fishermen, and workers.
Inflation (IDCPIY) exceeded 8 percent in four of the seven months after Indonesia last raised fuel prices in June 2013, and the central bank forecasts a 5.2 percent pace this year without any fuel-price increase.
“If fuel prices are increased by 1,000 rupiah, then inflation this year may be 6.3 percent,” he said. “We will consider and weigh many aspects. If fuel prices are raised by 3,000 rupiah a liter, then the addition to inflation will be about 3.2 percentage points added to 5.2 percent, so inflation will be about 8.4 percent.”

Photographer: Andri Tambunan/Bloomberg

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Bonds Gain

The central bank kept its benchmark interest rate unchanged at 7.5 percent for an 11th straight meeting this month, after increasing it by 1.75 percentage points last year.
Government bonds due March 2024 extended gains after the comment, with the yield falling six basis points, or 0.06 percentage point, to close at 8.04 percent, according to prices from the Inter Dealer Market Association. That’s the biggest yield drop since Oct. 20.
“Bank Indonesia is likely saying that the current reference rate is sufficient to manage the inflationary impact of the fuel-subsidy revision,” said I Made Adi Saputra, a fixed-income analyst at PT BNI Securities in Jakarta. “Bonds have priced in higher inflation ahead, so it’s positive that the policy rate may be kept steady.”
The central bank considers many aspects in deciding its policy on interest rates, the exchange-rate, liquidity management and macroprudential measures, Warjiyo said.
“We want to ensure the impact on inflation remains manageable and short-term,” he said. “We want to ensure the impact to the current-account deficit continues to improve. We want to ensure that the impact on liquidity and economic growth is also managed. All these factors will be taken into account in responding using monetary policy.”