Bank Indonesia defends aggregate targeting policy

Bank Indonesia defends aggregate targeting policy

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad
Djiwandono defended yesterday the central bank's policy of
targeting monetary aggregates to contain inflation.

Soedradjad said the central bank would continue to implement
and adjust market-friendly instruments, such as open market
operations, discount windows and the reserve requirement, to
control the money supply.

"Our ultimate goals are low inflation, high growth and a
sustainable external balance of payments," Soedradjad told
reporters at his office.

To achieve these three objectives simultaneously, Soedradjad
said, the central bank must not only control base money
(currency) but also influence the money supply in narrow and
broad terms.

He contended that in an open economy like Indonesia's the
relationship between base and monetary aggregates became
uncoupled and their growth became unpredictable.

"But please, don't conclude that we are shifting our targeting
from base money to monetary aggregates. Base money is our
operational target, while monetary aggregates are our
intermediate targets to reach our ultimate targets," Soedradjad
said, referring to the analysis of Australian economist Ross H.
McLeod last week.

McLeod told a seminar at the Center for Strategic and
International Studies here that targeting monetary aggregates
other than base money would be inappropriate because it would not
be effective in controlling inflation.

Persistent inability to keep inflation within the target of 5
percent per annum had resulted from a failure to sufficiently
suppress the growth of base money relative to its demand, McLeod
concluded.

He said that an unwillingness to acknowledge the pivotal role
of base money in determining inflation was leading to the
introduction and reintroduction of policies which threatened the
achievements of banking deregulation in the 1980s.

The policies concerned include credit ceilings through moral
suasion and increases in the reserve requirement from 2 percent
to 3 percent in February 1995 and to 5 percent next April.

Soedradjad argued that McLeod's contention was extremely
theoretical and disregarded the realities of Indonesia's economy.

"Doesn't he know that we tightly monitor the development of
base money?" Soedradjad asked. "If we do not publicly announce
the targeted growth of base money, it does not mean that we do
not care about it."

He said a steering committee within the central bank met
weekly to consider economic developments and monitor the
performance of base money in view of projected targets.

The meetings, chaired directly by the governor or a managing
director responsible for open market operations, discussed open
market operations to be undertaken and considered necessary
changes to maintain the stability of the foreign exchange rate
without undue loss of exchange reserves, he said.

In such a globalized economy, full of uncertainty, Soedradjad
noted, the central bank needed more market friendly instruments
to influence market directions.

He said his policy of increasing the compulsory reserve
requirement for banks was not directly intended to contain
inflation but to improve prudential banking practices among local
banks.

"As a monetary instrument, the reserve requirement is not a
substitute for our market operations but it does complement our
existing instruments," Soedradjad said.

He contended that even countries like the United States still
imposed reserve requirements of 10 percent on their banks. And
all other countries in Southeast Asia imposed even higher reserve
requirements.

The governor argued that moral suasion was not a credit
ceiling although it was intended to control credit expansions
among banks to contain inflation

"So, we are pragmatic and eclectic in pursuing and applying
our policy, so if we have to err, we err on the safe side," he
added. (rid)