Although it was clear that Indonesia would see a high inflation rate in July 2013 as the impact of higher fuel prices would kick in, Indonesia's central bank (Bank Indonesia) was surprised to see the figure go up to 3.29 percent. Currently, Indonesia's annual inflation rate stands at 8.61 percent. Bank Indonesia's governor Agus Martowardojo said that this rate is far outside the central bank's target range and announced that the institution expects annual inflation to stay above 8% throughout 2013, higher than its previous assumption of 7.8% at end-2013.
The increase in prices of subsidized fuels were the main driver of Indonesia's July 2013 inflation rate. The fuel prices made many commodity prices higher due to higher transportation costs. Apart from the fuel issue, the holy fasting month Ramadan (followed by the Lebaran celebrations) and the new school year contribute to higher inflation as well. However, Bank Indonesia still expects inflation in August and September to ease to below 1 percent.
Indonesia's central bank will ask the government to enhance spending of its revised State Budget (APBN-P) in order to support economic growth. The bank would also like to see more policies that curtail imports while support exports as the country's trade balance has been in deficit. Yesterday (02/08), Indonesia's bureau for statistics announced that Indonesia's economic growth has slowed down to 5.81 percent (YoY) in the second quarter of 2013. This is the lowest growth rate since Q3-2010.
On 15 August 2013, the next board-of-governors meeting will be held. In this meeting the main focus will be on the inflation issue. The result of this meeting will perhaps end current speculation about whether there will be another hike in the country's benchmark interest rate (BI rate). In June and July 2013, Bank Indonesia raised the BI rate from a historically-low 5.75 percent to 6.50 percent in order to mitigate high inflation and to support the weakening Indonesian rupiah.