Bank Indonesia Sees Stronger Rupiah, Lower February Inflation

JAKARTA, KOMPAS.com - Inflation in Indonesia is expected to ease in February, while the rupiah will likely continue on its strengthening bias, Bank Indonesia officials said Friday.

“The inflation rate in February will likely be lower than last month as we have observed that the increase in the prices of food commodities that caused (the high) inflation in January has slowed down, and some commodity prices even declined,“ Bank Indonesia Deputy Gov. Hartadi Sarwono told Dow Jones Newswires.

Sarwono said he expects on-month core inflation to ease to 0.5% this month, from 0.89% in January. Separately, Bank Indonesia Gov. Darmin Nasution told reporters after a meeting with France's Finance Minister Christine Lagarde, he expects on-year inflation to ease to below 7% this month, from 7.02% in January.

Bank Indonesia earlier this month raised its benchmark overnight rate by 25 basis points to 6.75%--its first move since August 2009 when it cut the rate by the same magnitude--after inflation continued to stay stubbornly above its 2011 year-end target of between 4%-6%.

Several analysts expect the central bank to leave its benchmark rate unchanged when it meets next Friday if the rate of inflation slows in February. Bank Indonesia has been reluctant to raise interest rates for fear of attracting further inflows of so-called hot money.

Instead, it has indicated that it will allow the rupiah to continue strengthening against the dollar to help rein in inflation. Nasution Friday reiterated that the local currency, which recently rose to its highest levels since June 2007, is still on a strengthening track and “is not overvalued.“

“The current rupiah level is in line with our economic fundamentals,“ he said.

He added that the country's foreign exchange reserves will likely rise to between $110 billion and $120 billion by the end of the year. The reserves were at $97.7 billion as of Feb. 22, a $2.4 billion increase from the end of January, partly due to foreign fund inflows.