Indonesia Mindful of Inflation Amid Rate-Cut Room, Sarwono Says

Bank Indonesia remains mindful of inflation even as it sees room to cut interest rates further if needed, Deputy Governor Hartadi Sarwono said.

Gains in the rupiah are helping reduce imported price pressures and policy makers are “happy” with the trend of easing inflation, Sarwono said in an interview in Singapore today. The central bank’s 2012 inflation target for prices to rise 3.5 percent to 5.5 percent will likely be met, he said. The next policy meeting is scheduled for Jan. 12.

Indonesia’s inflation (IDCPIY) slowed for a fourth straight month in December to the lowest level since March 2010, an easing that may give the central bank scope to resume rate cuts as Europe’s growth prospects deteriorate. Bank Indonesia Governor Darmin Nasution and his board left the benchmark rate at 6 percent last month after reductions in October and November, joining New Zealand and South Korea in holding borrowing costs.

“The room is there as currently inflation is below our target, but there’ll be pressure from administered prices because there’s a possibility in April that the government will limit the domestic fuel subsidies,” Sarwono said. “Adjustments in domestic fuel prices will have an impact on inflation and it’s important for the central bank to monitor the second-round effects.”

Indonesia plans to end the sale of subsidized fuel to private cars in the greater Jakarta area in April, the Jakarta Post reported Jan. 3, citing Agus Budihartono, a committee member at BPH Migas, the nation’s regulator for the oil and gas downstream industry.

Consumer prices (IDCPIY) rose 3.79 percent from a year earlier in December, the Central Bureau of Statistics said this week. Inflation was 4.15 percent in November.

“We are happy with the trend of inflation which is coming down,” Sarwono said. “The combination of monetary policy responses and our flexible exchange rate with the appreciation of the rupiah is helping reduce inflation, especially imported inflation.”

The rupiah has gained about 0.4 percent since reaching a 17-month low of 9,240 against the U.S. dollar on Nov. 29.

Indonesia’s economy probably grew 6.5 percent in last year, Finance Minister Agus Martowardojo said at a press briefing in Jakarta today. The nation’s budget deficit in 2011 was about 1.27 percent of gross domestic product, he said.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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