Inflation continued to ease in February

Aditya Suharmoko, THE JAKARTA POST, JAKARTA | Tue, 03/03/2009 12:13 PM 
 

JP/IRMA

Inflation further slowed in February, according to the Central Statistics Agency (BPS), providing more headroom for the central bank to cut its benchmark interest rate to spur economic activities and growth. 

On-year inflation stood at 8.6 percent last month, down from 9.17 percent in January, BPS head Rusman Heriawan said in a press conference on Monday. 

But consumer prices rose 0.21 percent from January. Indonesia previously saw deflation in January and December of 0.07 percent and 0.04 percent, respectively. 

Aside from foods, gold was among the items whose price was up significantly. “The gold price follows the exchange rate (of rupiah to the US dollar),” said Rusman. 

Since February, the rupiah has hovered around the 12,000 level to the dollar. On Monday, the rupiah declined 0.1 percent to 11,989 at 4:34 p.m. in Jakarta, Bloomberg reported. 

Meanwhile, gold touched an 11-month high of $1,006.29 per ounce on Feb. 20. 

Food prices increased the most in February at 0.95 percent due to bad weather, while transportation costs even declined 2.43 percent due to the fuel price cuts, said Rusman. 

Purbaya Yudhi Sadewa, Danareksa Research Institute’s chief researcher, forecast inflation would slow to 6 percent by the end of the year prompting a continuing fall in the central bank key interest rate. 

“With a real interest (rate) —  nominal interest minus inflation — of 1.5 percent, the Bank Indonesia (BI) rate will  be about 7.5 percent.” 

Meanwhile, Fauzi Ichsan, Standard Chartered Bank’s senior economist, said BI would likely cut its rate to 7 percent by the year’s end as inflation would slow to 5.5 percent. 

“Inflation declines as commodity prices drop, the economy slows and consumer spending is cut,” he said. 

Last year, inflation stood at 11.06 percent on average during the year. 

President Susilo Bambang Yudhoyono said the economy might get worse during the year. 

“There is a possibility that things will get worse before they get better ... The latest breaking news is that the contagion of this epidemic has hit the real economy and has now threatened the collapse of manufacturing industries,” he said. 

Purbaya said banks should translate the BI rate cut into lending rate cuts to spur economic growth. 

“If bank lending rates are kept below 13 percent, the economy will run, as shown before. The government and BI should urge banks to cut their lending rates.” 

Otherwise, he added, the BI rate cut would not contribute anything to the real sector. 

“Banks often put a large gap between the deposit rates and lending rates to gain higher profits. What they don’t realize is if lending rates are lower, historically non-performing loans will decline, increasing their profits, as people will have more ability to pay back their debts,” said Purbaya. 

The central bank is targeting lending this year to grow by 15.7 percent, far below the 30 percent average growth booked last year. 

Indonesia would need the banking sector to help stimulate activities in the real sector and to generate economic growth of no less than 4.5 percent, as assumed by the 2009 state budget.

The economy expanded 6.1 percent last year. The central bank will hold its next collegial meeting on March 4 to determine its rate. (hdt)