Indonesia Central Bank Chief Tackles Inflation

Indonesia's central bank governor said he would "do whatever it takes" to bring annual inflation below 10 percent in 2009, from 11.9 percent in July, as elections next year will ensure strong
economic growth.


Southeast Asia's biggest economy -- which expanded 6.3 percent in 2007, the fastest pace in 11 years -- will be sustained by strong domestic demand thanks to parliamentary and presidential elections next year, Governor Boediono told Reuters in an interview at the weekend.

"During election years, demand will always be strong. So there is no problem. There is no need to urge us, the monetary authorities, to offer additional stimulus" to boost growth, said Boediono, speaking at his home near Yogyakarta, central Java.

"My focus therefore is to stabilise prices so that we can bring down inflation from 11.9 percent to a single-digit number."

Indonesia holds parliamentary elections in April 2009, and presidential elections a few months later.

Typically, political parties in Indonesia spend money on gifts such as tee-shirts and food to woo voters in a country of 226 million people, delivering a significant boost to the economy.

The statistics bureau is due to release August inflation data later on Monday.

Analysts polled by Reuters expect annual inflation of 11.9 percent, and predict Bank Indonesia will raise its key interest rate again, by 25 basis points, at its monetary policy meeting later this week, marking the fifth hike this year.

Bank Indonesia has raised interest rates by a total of 1 percentage point to 9.0 percent to contain inflation.

Boediono declined to comment on the outlook for interest rates, but said the central bank would use all monetary tools available to curb inflationary pressures, which mainly stem from higher fuel and food prices.

While the United States and Europe face the prospect of slowing growth or even recession, and a crisis in the financial system, Indonesia can afford to tackle inflation using monetary tightening without having to worry about the impact on GDP growth or weakness in the domestic financial system, Boediono said.

"We are fortunate as our financial system is okay so that it is easier to make decisions compared to other countries," he said.

"In my view, we only have to face one problem," said Boediono, who like many Indonesians only uses one name. For Indonesia, "the issue here is really about inflation."

Even though current real domestic interest rates -- the difference between inflation and nominal interest rates -- are negative, Boediono said that was not a problem for Indonesia and was common in other countries in the region.

He also said the central bank does not target a specific level for the rupiah, even though market players believe Bank Indonesia has intervened in the market to keep the currency at around 9,100 per dollar in order to curb imported inflation.

On Aug. 5, the central bank forecast annual consumer inflation at between 11.5-12.5 percent at the end of 2008, easing to 6.5-7.5 percent next year. Annual inflation spiked after the government hiked subsidised fuel prices by an average of nearly 30 percent in May.

Indonesia has been largely isolated from the impact of the financial market turmoil in the United States, as its commercial banks have relatively small exposure to the U.S. debt market.

Many of the local banks are relatively well-capitalised following a costly bailout in the wake of the 1997-98 Asian financial crisis.