BI expects govt to raise fuel prices before Fed rate hike

REPUBLIKA.CO.ID, JAKARTA — Bank Indonesia (BI) expects the next government will increase prices of subsidized fuels before the Federal Reserve raises the Fed fund rate, probably in mid-2015.

“It would be better if prices are raised in the fourth quarter. But the increase must not go beyond February 2015,” BI Senior Deputy Governor Mirza Adityaswara said at the BI office complex here on Friday.

The faster fuel prices are raised the better it will be, he added.

The increase in fuel prices will demonstrate the strong intention on the part of the new government to make structural reforms earlier than expected, he said.

Raising fuel prices is a proper alternative to address the budget deficit and the current account deficit. If the policy to raise fuel prices is put on hold, the impact of fuel price hikes on the inflation rate will be delayed accordingly, prompting BI to continue its tight monetary policy, he said.

“If the prices of fuels are raised now, the inflation rate will fall more quickly,” he said.

Mirza expressed hope that fuel prices will be raised spontaneously at a higher level, rather than gradually at a low level.

“If fuel prices are raised by Rp1,000 per liter, the nation will continue to record an inflation rate, but it can overcome the budget deficit for the budget year 2015 and the current account deficit in 2015 will become smaller,” he said.

Mirza said he was convinced that the current account deficit will be more positive if prices of subsidized fuels are raised and oil imports, which have burdened the state budget, can be reduced.

He noted that if prices of subsidized fuels are raised by Rp3,000 per liter, the inflation rate will increase by 2.5 to 3 percent.

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