The Indonesian government assumes that the recently increased prices of subsidized fuels will translate into lower oil imports from the third quarter of 2013. Lower oil imports will result in lower demand for foreign currencies and, as such, will support Indonesia's currency, the rupiah. The value of the IDR rupiah is also influenced by market participants' expectation of inflation. Indonesia's central bank (Bank Indonesia) projects inflation to rise to 2.77 percent in July, and to slow down to 1 percent in both August and September.
Indonesia has been experiencing a trade deficit, which is partly the result of rising oil imports in recent years in line with rising domestic consumption of the fossil fuel. The government raised the price of subsidized gasoline by 44 percent and diesel by 22 percent on 22 June 2013 in order to relieve the ballooning budget deficit. However, this measure has triggered higher inflation. In June 2013, inflation stood at 5.90 percent (YoY). Total annual inflation is expected to rise to 8 percent in 2013.
In order to mitigate higher inflation and support the Indonesian rupiah, Bank Indonesia raised its benchmark interest rate by 25 basis points to 6.0 percent in June 2013. One month later, the institution raised its interest rate again to 6.50 percent. Previously, the central bank maintained a historic low BI rate of 5.75 percent for 16 months. It has been speculated that if July's inflation rate will be higher than expected, the benchmark interest rate will be raised again, which will come at the expense of economic growth.
With the notable exception of China, most Asian currencies have weakened significantly against the US dollar in 2013. Indonesia's central bank lets the rupiah depreciate gradually instead of using its foreign exchange reserves to support the currency.| Source: Bank Indonesia
Source: Statistics Indonesia (BPS)