News Room - Business/Economics

Posted on 04 Jan 2008

Indonesia sees inflation easing in 2008/9

Indonesia expects inflation to ease this year and next from 2007 partly due to an improvement in the distribution of basic goods, government officials said on Thursday.

Analysts, however, have said they expected domestic inflation in Indonesia to remain high this year, fuelled by the weak rupiah currency , strong economic growth, and worries that the government may raise fuel prices to cut oil subsidies.

Finance Minister Sri Mulyani Indrawati told a news conference that the government forecast inflation at 4-6 percent this year, 3.5-5.5 percent in 2009 and 3-5 percent in 2010.

Year-end inflation was at 6.59 percent in 2007.

Officials said the government would focus more on how to reduce the cost of distributing basic goods in the vast archipelago, home to 220 million people, partly by higher budget spending on infrastructure.

"This is our commitment ... how to reduce the cost of (distributing) basic items because inflation in Indonesia is in large part due to these factors," chief economics minister Boediono (eds. one name) was quoted by Reuters as telling a news conference.

Central bank governor Burhanuddin Abdullah expects the generally improving inflation to help attract investors to Indonesia and bring domestic inflation to levels similar to its trading partners in the Southeast Asian region.

Abdullah declined to comment on how the inflation forecast would affect the central bank's interest rate policy. The central bank will review its interest rate policy on Tuesday next week.

The central bank cut its one-month target rate to 8 percent in December, its 14th cut from a high of 12.75 percent in 2006 as inflation tumbled.

But the rate cuts undermined the rupiah, which was Asia's worst-performing currency against the dollar in 2007 with losses of 4.3 percent. Most other Asian units rose against the dollar.

The currency's weakness, global market uncertainties, and domestic price pressures are likely to persuade the central bank to keep its key rate unchanged in January, analysts said.