Bank Indonesia defends aggregate targeting policy<\/p>\n
JAKARTA (JP): Bank Indonesia Governor J. Soedradjad
\nDjiwandono defended yesterday the central bank's policy of
\ntargeting monetary aggregates to contain inflation.<\/p>\n
Soedradjad said the central bank would continue to implement
\nand adjust market-friendly instruments, such as open market
\noperations, discount windows and the reserve requirement, to
\ncontrol the money supply.<\/p>\n
\"Our ultimate goals are low inflation, high growth and a
\nsustainable external balance of payments,\" Soedradjad told
\nreporters at his office.<\/p>\n
To achieve these three objectives simultaneously, Soedradjad
\nsaid, the central bank must not only control base money
\n(currency) but also influence the money supply in narrow and
\nbroad terms.<\/p>\n
He contended that in an open economy like Indonesia's the
\nrelationship between base and monetary aggregates became
\nuncoupled and their growth became unpredictable.<\/p>\n
\"But please, don't conclude that we are shifting our targeting
\nfrom base money to monetary aggregates. Base money is our
\noperational target, while monetary aggregates are our
\nintermediate targets to reach our ultimate targets,\" Soedradjad
\nsaid, referring to the analysis of Australian economist Ross H.
\nMcLeod last week.<\/p>\n
McLeod told a seminar at the Center for Strategic and
\nInternational Studies here that targeting monetary aggregates
\nother than base money would be inappropriate because it would not
\nbe effective in controlling inflation.<\/p>\n
Persistent inability to keep inflation within the target of 5
\npercent per annum had resulted from a failure to sufficiently
\nsuppress the growth of base money relative to its demand, McLeod
\nconcluded.<\/p>\n
He said that an unwillingness to acknowledge the pivotal role
\nof base money in determining inflation was leading to the
\nintroduction and reintroduction of policies which threatened the
\nachievements of banking deregulation in the 1980s.<\/p>\n
The policies concerned include credit ceilings through moral
\nsuasion and increases in the reserve requirement from 2 percent
\nto 3 percent in February 1995 and to 5 percent next April.<\/p>\n
Soedradjad argued that McLeod's contention was extremely
\ntheoretical and disregarded the realities of Indonesia's economy.<\/p>\n
\"Doesn't he know that we tightly monitor the development of
\nbase money?\" Soedradjad asked. \"If we do not publicly announce
\nthe targeted growth of base money, it does not mean that we do
\nnot care about it.\"<\/p>\n
He said a steering committee within the central bank met
\nweekly to consider economic developments and monitor the
\nperformance of base money in view of projected targets.<\/p>\n
The meetings, chaired directly by the governor or a managing
\ndirector responsible for open market operations, discussed open
\nmarket operations to be undertaken and considered necessary
\nchanges to maintain the stability of the foreign exchange rate
\nwithout undue loss of exchange reserves, he said.<\/p>\n
In such a globalized economy, full of uncertainty, Soedradjad
\nnoted, the central bank needed more market friendly instruments
\nto influence market directions.<\/p>\n
He said his policy of increasing the compulsory reserve
\nrequirement for banks was not directly intended to contain
\ninflation but to improve prudential banking practices among local
\nbanks.<\/p>\n
\"As a monetary instrument, the reserve requirement is not a
\nsubstitute for our market operations but it does complement our
\nexisting instruments,\" Soedradjad said.<\/p>\n
He contended that even countries like the United States still
\nimposed reserve requirements of 10 percent on their banks. And
\nall other countries in Southeast Asia imposed even higher reserve
\nrequirements.<\/p>\n
The governor argued that moral suasion was not a credit
\nceiling although it was intended to control credit expansions
\namong banks to contain inflation<\/p>\n
\"So, we are pragmatic and eclectic in pursuing and applying
\nour policy, so if we have to err, we err on the safe side,\" he
\nadded. (rid)<\/p>",
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