Indonesia’s fuel prices to hike by 20-30% in the next 2 years

It would probably surge inflation by 6-7%.

Joko Widodo is taking office later this month, and with him are his plans for higher fuel prices.

According to a report by UOB, Indonesia’s new government will be pushing for higher fuel prices to contain its fuel subsidy spending and current account deficit.

UOB adds that this will bring a risk of interest rate hikes ahead, depending on when the fuel price adjustment takes place.

The base-case scenario is a 20-30% hike in fuel prices per annum in 2015-2016 which would lead to a resurgent in inflation towards an average of 6-7%. Recently, it emerges that the government could be planning to hike fuel prices by Rp3000/litre (up 46%) in late October or November. In this case, UOB expects headline inflation to jump to 8-8.5% by year-end, bringing the average inflation rate to 6.5%.