Indonesia raises interest rates after fuel price increase

JAKARTA, Nov 18 (AFP): Indonesia's central bank raised interest rates Tuesday for the first time in a year in anticipation of surging inflation after the new government increased the price of subsidised fuel by over 30 per cent.

At a special meeting called following the price increase, Bank Indonesia raised its key rate by 25 basis points to 7.75 per cent, the first rise since November last year and its highest level for more than five years.

President Joko Widodo announced the reduction in government fuel subsidies late Monday, his first major move to strengthen the economy since taking office last month.

The government estimates the fuel price rise will lead to about $8 billion of savings in next year's budget, money that Widodo plans to divert to overhauling infrastructure and funding policies to help the poorest.

But inflation is expected to jump sharply in the coming weeks as the fuel price rise pushes up the cost of transporting goods, and the central bank's move was aimed at keeping it in check.

"Even though there will be a price increase in the short term, Bank Indonesia... is sure that inflation pressure will remain under control and will be temporary," bank governor Agus Martowardojo said after the more than seven-hour meeting.