One of the downsides to Indonesia’s impressive economic growth is high inflation, which surpassed the target of 4-6% and hit 6.96% in 2010. It doesn’t seem to be falling, and crop failures which raised the price of staple foods like chillies haven’t helped. The government, though, has so far resisted pressure to raise official interest rates, which have sat at 6.50% for 17 months.

Indonesia is one of the only Asian countries to not raise lending rates in the past year. The government fears it would increase the risk of short-term ‘hot money’ flowing in from overseas and destabilizing the economy if speculators suddenly decided to take their money elsewhere. The Jakarta Composite Index (JCI), which grew 46% in 2010, dropped 10% last week as investors took profits on rumors of an interest rate hike.

Central bank governor Darmin Nasution said it was a matter of finding the ‘right time’ to raise rates, and smaller rises could be used in conjunction with other levers to combat the inflationary threat. He also said the central bank will continue to allow the rupiah to rise, after it strengthened 4% against the US dollar last year.

source & article: AFP via Channel NewsAsia