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)