RI'S 2008 Inflation to Reach 12.2 Percent

Jakarta - Indonesia's full-year inflation rate in 2008 is expected to reach 12.2 percent as the on-month inflation rate in August stood at 0.51 percent, an economist said.

"The governmment will find it very hard to achieve its inflation rate target of 11.4 percent set for this year. I predict the inflation rate would reach 12.2 percent in view of the current favorable economic developments," Ichsanuddin Noorsy of the Indonesia Awakening Team said here on Monday.

The Central Bureau of Statistics (BPS) said earlier in the day Indonesia's monthly inflation rate in August 2008 reached 0.51 percent, bringing the calendar inflation rate to 9.4 percent and the on-year inflation rate to 11.85 percent.

The August 2008 inflation was mainly the result of a 0.94 percent rise in the prices of foodstuffs and a 1.36 percent increase in the prices of services in the education, recreation and sports sectors, BPS Chief Rusman Heriawan said.

"The BPS did not record any increase in transport fares in August," he said.

The agency noted a rise in the prices of a number of commodities including fresh fish, chicken meat, eggs, and liquefied petroleum gas (LPG) as well as an increase in senior high school tuition fees contributed a lot to the August 2008 inflation.

"Although the rise in the prices of LPG was postponed it had contributed to the August 2008 inflation rate. The rise in senior high school tuition fees followed an increase in elementary and junior high school tuition fees a month earlier," he said.

The BPS chief said the prices of a number of commodities including gold, onion, chili, Pertamax gasoline and cooking oil fell in August.

Ichsanuddin said the inflation remained a "disease" because of uncertainty in the global economy.

"The uncertainty is expected to continue until the first semester of 2009 and the prices of commodities will remain volatile," he said.

The other indication was the persistent steep rise in the prices of materials for infrastructure projects at home, he said.

"Meanwhile at the same time the prices of food commodities have shown no sign of stability," he added.

The newly-announced rise in the prices of liquefied petroleum gas would drive up the prices of other goods, putting a further strain on the inflation rate, he said. "The multiplier effect of the rise in the prices of LPG will continue," he said.

Indonesian bank governor vows to reduce inflation

By Gde Anugrah Arka and Adriana Nina Kusuma

The governor of the Indonesian central bank 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 are expected to ensure strong economic growth.

Indonesia, the biggest Southeast Asian 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, the bank governor, Boediono, who goes by one name, said.

"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 improve the economy, said Boediono, speaking at his home near Yogyakarta, central Java.

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

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

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

"If we remember the 2004" elections, "demand was very strong then, spending was very significant. Money in circulation rose sharply in 2004," Boediono said. "If there is an impediment to growth, it is on the supply side, whether electricity, traffic jams," he said.

The Indonesian statistics bureau is due to release August inflation data later 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, which would be the fifth hike this year.

Bank Indonesia has raised interest rates by a total of 1 percentage point to 9 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 economic 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 effect on economic 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. The issue here is really about inflation."

Even though real 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 say they 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 percent and 12.5 percent at the end of 2008, easing to between 6.5 percent and 7.5 percent next year. Annual inflation spiked after the government hiked subsidized fuel prices by an average of nearly 30 percent in May.

Indonesia has been largely isolated from the effect 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-capitalized following a costly bailout in the wake of the 1997-98 Asian financial crisis.