Indonesia says economy is more resilient to absorb inflation shocks

Indonesia is taking steps to make its economy more resilient so it can withstand global shocks like inflation, especially in the United States, Finance Minister Sri Mulyani Indrawati said.

As the world’s largest economy, what the United States is doing has strong implications around the world, including in Indonesia, the minister said.

To fight inflation, the United States raised interest rates, which affected capital outflows due to the strengthening dollar, Sri Mulyani told CNBC’s “Street Signs Asia” on Thursday.

In light of this, the finance minister said, Indonesia is making more efforts to “increase its resilience”.

This involves “making sure first that the financial sector is healthy and strong for this interest rate move. Second, that the real sector economy is also going to be resilient so they can absorb this shock,” said Sri Mulyani, who attends the Group of 20 meeting of finance ministers and central bankers in India this week.

In early February, the US Federal Reserve raised its benchmark interest rate by a quarter of a percentage point and gave little indication that it was nearing the end of this hike cycle.

Unlike in the United States, where inflation remains stubbornly high, Indonesian inflation slowed in January.

The headline consumer price index, a key gauge of inflation, fell to 5.28% year-on-year in January from 5.51% in December, according to government data.

Stripping out volatile food and energy prices, core inflation stood at 3.27% in January year on year, down slightly from 3.36% in December, according to the data.

Last week, Indonesia’s central bank kept its seven-day repo rate at 5.75%, pausing after six consecutive hikes. But inflation is still well above Bank Indonesia target range between 2% and 4%.

Still, Indonesia has done well in coordinating its fiscal and monetary policy tools to contain inflation and sustain growth, Sri Mulyani said.

She added that the government is also supporting the central bank to ensure that inflation remains low so that it does not hurt the purchasing power of its people.

“We also know that the source of inflation does not come from the central bank, money circulation or the money supply. We also find that inflation comes from a supply side. That is why we have addressed this issue,” Sri Mulyani said, stressing inflation will moderate this year.