Interest rates rise<\/p>\n
The new wave of increases in bank deposit rates over the last
\nfew days is not surprising at all, especially after the central
\nbank raised the discount rate on its short-term securities by a
\nhalf percentage point on Friday. That, we think, reflects in part
\nthe market's doubts about the government's ability to curb
\ninflation.<\/p>\n
Despite the government's reaffirmation of its commitment to
\nstronger anti-inflation measures at the monthly limited cabinet
\nsession on economic affairs over the last four months, the
\nconsumer price index has continued its upward trend. In fact, the
\ninflation last month reached 1.60 percent, almost three times as
\nhigh as that in March, when the consumer price index had been
\nexpected to top the monthly increase due to the Moslem Idul Fitri
\nholidays. We wonder, how the government will be able to check
\nthis year's inflation at a single digit, when the rise in the
\nconsumer price index has reached as high as 4.7 percent in four
\nmonths.<\/p>\n
The central bank's decision to raise the discount rate on its
\nshort-term securities by a half percentage point on Friday, or
\ntwo days after the announcement of the April inflation rate, was
\nsimply a logical response to the inflationary pressures. The
\nmonetary authority is indeed required to play its part in curbing
\nthe inflationary pressures through a tight monetary measure.<\/p>\n
Friday's increase in the central bank's discount rate was the
\nthird rise in the last four months. The discount rate was raised
\nby a half percentage point in January to cope with the
\nspeculative attacks on the rupiah, that were set off by the
\nMexican financial crisis, and by 0.25 percent in February as a
\nconsequence of a similar move by the U.S. Federal Reserve.<\/p>\n
A steady interest rate increase would obviously have a
\ndampening impact on new investment and affect share prices,
\nthereby discouraging new share issues, at least for the time
\nbeing. That in turn would increase the business sector's
\ndependence on bank loan funds as equity financing would become
\nrestricted.<\/p>\n
There is, we think, another reason that has compelled the
\ncentral bank to raise its discount rate and consequently the
\ninterest rates to curb the strong inflationary pressures. The
\ncentral bank cannot separate its monetary policy from its
\nexchange rate management. If the central bank wants to maintain
\nthe rupiah depreciation against the American dollar at the set
\ntarget of five to six percent this year, the interest rates have
\nto be raised, otherwise the market will not accept the prevailing
\nexchange rate as sustainable.<\/p>\n
Nonetheless, as the central bank itself and most analysts
\nhave acknowledged, monetary policy is only one of the measures
\nessential to curbing inflationary pressures. The central bank can
\nhelp curb demand-pull inflation by reducing the supply of money.
\nThe problem, though, is that the current inflation pressures have
\nbeen caused mostly by higher costs, either in the production or
\ndistribution of goods.<\/p>\n
The persistently strong inflationary pressures during the
\nfirst four months of this year have made it more imperative then
\never for the government to further deregulate economic activities
\nand to remove monopolistic and oligopolistic practices in the
\nmanufacturing industry. Hopefully, the new packages of reform
\nmeasures to be announced within this month will address most of
\nthe factors which have thus far been identified as the main
\ncauses of high production and distribution costs in the country.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/interest-rates-rise-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}