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INTERVIEW-UPDATE 1-Indonesia says inflation dropping fast, rupiah still weak
September 11, 2013 / 10:24 AM / 4 years ago

INTERVIEW-UPDATE 1-Indonesia says inflation dropping fast, rupiah still weak

(Recasts, adds comments by trade minister)

* Sept inflation will be “very, very low” - BI deputy gov

* Sees current a/c deficit trending down in Q3

* Govt moved to rein in inflation with measures-trade min

By Rieka Rahadiana and Andjarsari Paramaditha

JAKARTA, Sept 11 (Reuters) - Indonesia is sharply cutting inflation and starting to trim its ballooning current account deficit, two top officials said, pointing to issues that are testing confidence in Southeast Asia’s biggest economy and have sent its currency sliding.

On Thursday, the central bank will hold its second meeting in as many weeks to decide on its interest rate policy after 50 basis point hikes in both its main rates at a rare extra meeting on Aug. 29. Most economists polled by Reuters expect it to hold rates unchanged.

“We have seen deflation in the first week (of September)...this month (month-on-month) inflation will be very, very low,” Deputy Governor of Bank Indonesia, Perry Warjiyo, told Reuters in an interview on Wednesday.

He cited subdued domestic demand as a major factor. However, annual inflation remains stubbornly high, hitting 8.79 percent in August, driven up by June average 33 percent increase in fuel prices.

Perry was also confident the current account deficit, which hit 4.4 percent of GDP in the second quarter, would trend down in the third quarter.

Concern over the current account has sparked a sell-off in the rupiah, sending it down to 4-1/2-year lows. It has fallen more than 16 percent against the dollar since the start of the year and was down 2.35 percent alone on Wednesday.

The government has instituted a range of policy measures since last month to try to head off more attacks on the currency, making it the worst performer in Asia.

Trade Minister Gita Wirjawan, in a separate interview with Reuters on Wednesday, said a number of measures recently implemented would take a little time to filter through the economy.

“The result won’t be instant but should be seen in 3-6 months,” he said.

He pointed to measures to enforce more use of biodiesel and so cut into import of fuel by the former OPEC member and which has become a major drag on the country’s trade balance. Indonesia’s is the world’s largest producer of palm oil and thus will be the source of the biodiesel.

The government is also moving to rein in inflation by measures to free up trade in basic foodstuff away from quotas which have been blamed for sparking price rises. He said those changes, to such products as beef and soybeans that have to be imported, would be permanent.

Economists warned that the measures will have to stick if investors are to renew confidence in the Indonesian economy.

“Market confidence is much better now, in line with improvement in the region, the United States, China and Japan. So now, the issue lies at home, how to maintain the positive situation because without structural changes, this condition would be temporary,” said Destry Damayanti, Chief Economist at Bank Mandiri. (Additional reporting by Jason Szep and Jonathan Thatcher; Editing by Jacqueline Wong)

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