Discount rate raised<\/p>\n
Bank Indonesia's decision to raise its discount rate by 0.25
\npoint last Friday following the 0.50 point rise in the U.S. Fed
\nkey interest rate is indeed essential to preventing another wave
\nof currency speculation.<\/p>\n
Another aspect, however, is the fact that the measure will
\nobviously hurt small and medium-scale banks which, unlike the big
\nbanks that have ample access to the inter-bank market, rely
\nlargely on the central bank's short-term funds. But because both
\nthe Fed move and Bank Indonesia's reaction were widely expected,
\nthe impact of the 0.25 point rise on the prevailing interest
\nrates will not likely be overly significant.<\/p>\n
Moreover, because most banks raised their deposit rates by
\nbetween one to two percentage points last month, the latest rise
\nin the central bank's key rates -- the second after the 0.50
\npoint increase in the middle of last month to defend the rupiah
\nagainst speculation -- will not necessarily force another
\nincrease in the deposit and lending rates.<\/p>\n
Also, the central bank's measure is timely for providing the
\nright signal to the market, especially after the speculative
\npressure on the rupiah three weeks ago as fallout from the
\nfinancial crisis in Mexico.<\/p>\n
The right signal, as well as consistency and predictability of
\nthe central bank's monetary policy, are crucial because the
\ncountry pursues a free foreign exchange regime and the exchange
\nrate of its rupiah is floated against a basket of major foreign
\ncurrencies. In such a situation, the central bank cannot afford
\nto have its interest rate (monetary) policy independent from its
\nexchange rate management as the international interest rates,
\nnotably those in the United States, have direct influence on the
\ndomestic currency market.<\/p>\n
However, the subsequent developments in the interest rates
\nstill depend on the expectations for inflation this year. The
\ngovernment has pledged to check inflation throughout the year at
\nless than six percent. Based on this target, the rupiah
\ndepreciation against the American dollar is envisaged at four
\npercent at the most for the whole year.<\/p>\n
We have often heard the government state its determination to
\ncurb the inflation rate at a single-digit level. For sure, a
\nsingle-digit level has been achieved over the last two years --
\n9.77 percent in 1993 and 9.24 percent in 1994 -- but those
\nfigures tottered on the brink of the two-digit level.<\/p>\n
Many analysts are doubtful that inflation can be checked at
\nthe government's targeted level in view of the inflationary
\npressures from the recent rise in civil service salaries and the
\nincrease in the regional minimum wages and mandatory Idul Fitri
\nbonus payments to workers. In fact, the inflation rate was
\nalready 1.16 percent in January. Although that rate was not
\nunusual, because the first month of the year usually posts the
\nhighest monthly rise in the consumer price index due partly to
\nthe government-mandated annual increase in the producer rice
\nprice, the price increases in January were still worrisome. We
\nthink the achievement in checking the rate of inflation for the
\nfirst quarter will be quite crucial for the success of the anti-
\ninflation measures, especially in view of the seasonal price
\nrises during the Moslem fasting month this month and the Idul
\nFitri holidays next month.<\/p>\n
Bank Indonesia's Governor Soedradjad Djiwandono has been doing
\nhis share in the anti-inflation drive by tightening the money
\nsupply. But, as he frankly admitted at a hearing with the House
\nof Representatives last week, monetary measures, although very
\nimportant, are only one of the components of the anti-inflation
\nprogram. The central bank's efforts will be rendered less
\neffective than possible if the distortions and hurdles in the
\nproduction and distribution sectors are not removed or at least
\nminimized. Hence, the pivotal role of new packages of
\nderegulation measures and bureaucratic reform.<\/p>",
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"sponsor": "Okusi Associates",
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