Indonesia sees strong FX to help tackle capital flows

The Indonesian rupiah has room to rise further to help tackle inflationary pressures arising from strong capital inflows, a central bank deputy governor said on Thursday. Budi Mulya told Reuters that a strong rupiah was a key component of the central bank's policy mix of macroprudential and monetary measures to contain inflation.
"Because we view capital flows continuing, certainly the policy of (allowing) currency appreciation is very proper," Budi said, speaking on the sidelines of a forum in London.
"There is room for the currency to appreciate further. Year-to-date, compared to other regional currencies, the competitiveness is still well-maintained." Earlier, Budi told the forum that a stronger currency was an "effective tool" at containing inflation expectations.
Since raising its overnight rate by 25 basis points in a surprise move in February, the central bank has let the rupiah strengthen to curb imported inflation.
The currency is trading at its strongest level to the dollar in more than seven years and is up about 5 percent since the start of the year. The central bank held its benchmark policy rate at 6.75 percent on Tuesday for a fifth straight month, saying price pressures were likely to remain under control with inflation on track to hit about 5.5 percent this year.
Indonesia could face higher inflationary pressures next year if the government finally moves to cut fuel subsidies as planned, Budi said on Thursday. "Next year, inflation may be a problem because the government may not lift its fuel subsidies this year but do it next year. Next year, the inflationary pressure will be stronger on the economy," he said.
Indonesia's parliament has pushed for a delay to the government's plan to curb fuel subsidies this year but an energy ministry official said on Thursday that private vehicles could be banned from using subsidised fuel as early as September. "What we see next year will depend on how the government acts on fuel subsidies," Budi said, noting that presidential elections scheduled for 2014 could push the government to act.
Nonetheless, he said the central bank could still meet its 2012 inflation target of 4.5 percent give or take 1 percent. "We anticipate that inflation expectations will be managed. We are confident that we are prepared for the possible move."
The central bank has lagged regional peers such as Thailand and India in lifting interest rates to counter inflation though analysts say Asian economies may have to tighten monetary policy further as growing domestic demand, surging property prices and tight labour markets conspire to sustain inflationary pressures. Budi said there was little evidence of a build-up of an asset price bubble in Indonesia, adding that bank lending growth was not excessive.