Indonesia central bank holds extraordinary meeting after fuel price rise

[JAKARTA] Indonesia's central bank convened an extraordinary meeting on Tuesday, fuelling speculation it will raise interest rates after the president hiked fuel prices to tackle the country's budget and current account deficits.

In his first major economic policy decision, President Joko Widodo on Monday night raised subsidised gasoline and diesel prices by more than 30 per cent to help fund his reform agenda.

The fuel-price news helped push Indonesian stocks up as much as 0.7 per cent on Tuesday, while the rupiah climbed to a 2-week high.

A Bank Indonesia (BI) spokesman said it would make an announcement at 0700 GMT on the benchmark interest rate, which has been kept at 7.50 per cent since November 2013.

The central bank has pushed for significant cuts in fuel subsidies, which have made it focus monetary policy on the big current account deficit instead of raising economic growth, which has fallen to 5.01 per cent, its slowest pace in five years.

Many economists expect the fuel hikes to add 2 percentage points to the inflation rate. But with inflation expected to be no more than 8 percent, some see little need for policy rates to be raised quickly.

The full impact of the higher fuel prices on the economy will only be felt in early 2015, they say.

"Given the relative stance of fiscal policy is tightening, we believe the prudent course of action for Bank Indonesia will be to hold policy steady," ANZ Bank said in a research note.

A rate rise would provide some support for the rupiah, which has fallen 6 per cent in six months against the dollar as investors worried about Indonesia's political situation and potential for capital outflows from one of Asia's highest-yielding bond markets. "A token hike of 25 bps might well take place in that context to help cement BI's revamped reputation as a more proactive central bank since 2013," said Wellian Wiranto, economist with OCBC Bank.

Between June and November 2013, BI raised its policy rate by 175 basis points.

Monday's fuel-price hike is expected to save the government of Southeast Asia's biggest economy more than US$8 billion next year. Jokowi has pledged to use the funds for infrastructure, health, education and agriculture.

There were no major protests on Tuesday about the price hikes. The government has promised to provide social assistance to millions of poor people to soften the impact.

REUTERS