JAKARTA--Indonesia's central bank held its key interest rate for the second straight month Thursday, with policymakers betting that a recent inflation spike caused by an increase in fuel prices will be temporary.
Bank Indonesia held the rate at 7.75 percent. It followed a 25 basis point increase in November after new President Joko Widodo raised fuel prices by almost a third in a bid to cut government subsidies that are a drain on the economy.
The move pushed inflation to 8.4 percent on-year in December, its highest level for five years, due to the increased cost of transport and delivering everyday goods to market.
But the central bank expressed confidence that inflation would ease in coming months. A slide in global oil prices has helped policymakers, dramatically cutting the cost of importing subsidised fuel.
It also encouraged the government to scrap subsidies for petrol entirely this month, with the price of fuel expected to dip in line with falling oil pries, which should help slow inflation, analysts said.
Observers have also expressed confidence that prices will soon slip back.
"The current spike in inflation is entirely due to the government's decision late last year to cut fuel subsidies," said Gareth Leather of Capital Economics.
"Past experience suggests the spike will prove temporary."
Bank Indonesia aggressively hiked rates last year after the country was hit by turmoil as the US moved towards ending its huge stimulus programme, prompting huge capital outflows from emerging markets.
The key rate is currently at its highest level for more than five years.
AFP
