By Michael Taylor and Kanupriya Kapoor
JAKARTA (Reuters) - Indonesia's new president raised subsidised fuel prices by more than 30 percent on Monday, a move that is expected to save the government of Southeast Asia's biggest economy more than $8 billion (5 billion pounds) next year.
President Joko Widodo's first major economic policy decision since taking the helm in October will help provide the necessary fiscal space to fund his reform agenda and tackle the country's twin budget and current account deficits.
"The government has decided to redirect fuel subsidies," Widodo told reporters at the presidential palace. "The country has needed a (larger) budget for infrastructure, healthcare and education but instead spent it on subsidizing fuel."
Indonesian fuel prices, among the cheapest in the world, were raised by 2,000 rupiah ($0.16) per litre, with subsidised gasoline now costing 8,500 rupiah a litre and diesel 7,500 rupiah.
The fuel price hike was welcomed by economists, but immediately sparked small protests and long queues at petrol stations in the capital.
"The move is encouraging since it suggests that (Widodo) is serious about economic reform in Indonesia, and is even prepared to take steps that may prove unpopular in the short run," said Gareth Leather of Capital Economics.
Finance Minister Bambang Brodjonegoro said he expected inflation to rise 2 percent to 7.3 percent this year after the fuel price rise, and that the inflationary impact would be felt through February 2015.
Economists said Bank Indonesia may need to raise interest rates as early as this month to tame inflation. "We expect BI to raise 25 bps either this month in an unscheduled meeting or in a monthly policy meeting in December depending on the impact," said Eric Sugandi, economist with Standard Chartered.
Analysts expected the news to support Indonesian stocks and bonds when markets open early Tuesday. The rupiah
Raising fuel prices is a sensitive issue that typically sparks protests and contributed to the downfall of long-serving autocrat and then president Suharto in 1998.
The decision to raise fuel prices was criticised by trade unions and some opposition politicians.
"This is not a wise decision right now," said Bobby Rizaldi, a member of the Golkar will be party, part of the opposition majority coalition. "Electricity prices have just been raised recently, the currency has been under pressure, and now the inflation higher than we anticipated at the beginning of the year."
Officials within Widodo's government have said any money saved from reduced subsidies would be diverted to spending on infrastructure, agriculture, education, and health projects.
Social assistance will also be available to 15.6 million people from Tuesday, Chief Economics Minister Sofyan Djalil told reporters, in a government drive to soften the impact of the fuel price rise on the poor.
(Additional reporting by Gayatri Suroyo, Adriana Nina Kusuma, Eveline Danubrata, Fransiska Nangoy, Wilda Asmarini, Fergus Jensen, Nicholas Owen and Randy Fabi; Editing by Keiron Henderson and Michael Urquhart)