Bank Indonesia remains unmoved by inflation threat

Bank Indonesia remains unmoved by inflation threat

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on
Friday that the central bank would not loosen its tight monetary
policy, despite complaints from the government that the current
interest rate level was already too high, due to concerns over
the threat of inflation.

Sjahril also said that although the rupiah had recovered
lately, Bank Indonesia would not move hastily to lower its
benchmark interest rate.

"We're still concerned with inflation. We won't hastily change
our policy (on the interest rate)," he told reporters at the
central bank headquarters following the weekly Friday prayer.

"We still have to wait for further developments (in the rupiah
and inflation)," he added.

The Central Bureau of Statistics reported on Wednesday that
year-on-year inflation in April reached 10.51 percent.

The Bureau warned that inflation this year could reach a
double digit level as the year-on-year inflation level during the
past three months had reached around 10 percent.

The government had initially forecast inflation in 2001 to
average at 7.2 percent. But the government is now planning to
revise the forecast to around 9.3 percent amid deterioration in
the country's macroeconomic condition.

Bank Indonesia has allowed its benchmark interest rate to
continue to rise during the past several months in a bid to help
defend the ailing rupiah as well as curb inflationary pressure.

The benchmark interest rate of Bank Indonesia's one-month SBI
promissory notes increased again to 16.16 percent on Wednesday at
the weekly regular auction.

Analysts said that stronger inflation was primarily
contributed to by the weakening of the rupiah against the U.S.
dollar as the country's production system relied heavily on
imported raw materials.

Last week, the rupiah plunged to a 31-month low of Rp 12,300
per dollar, compared to the government 2001 target of Rp 7,800
per dollar, amid worries over possible violence between
supporters and opponents of President Abdurrahman Wahid, who was
facing a second censure by the House of Representatives over
alleged involvement in two financial scandals.

But as the violence did not materialize after the House issued
its second censure early this week, the rupiah managed to
appreciate during the past few days and reached around Rp 10,976
per dollar late on Friday.

Analysts, however, said that the risk of the rupiah falling
again was still high as there were no signs of improving
relations between Abdurrahman and the House. The censure could
lead to the impeachment of the President by the People's
Consultative Assembly, possibly in August.

"If pressure on the rupiah remains due to various
uncertainties, it's normal for us (Bank Indonesia) to react
(through interest rate policy)," said Sjahril, who has been asked
by Abdurrahman to resign. The government is proposing a bill to
the House to amend the existing central bank law that may result
in the dismissal of Sjahril.

Coordinating Minister for the Economy Rizal Ramli had earlier
complained that the current interest rate level was already too
high and could be detrimental to the still weak banking sector,
stalled economic growth, and could impose a heavier burden on the
already strained state budget.

Bankers have also warned that if the benchmark interest rate
reaches the 17 percent level, many banks could suffer further
financial woes.

The higher SBI rate would also increase the burden of the
state budget, which covers the interest of the massive bonds
issued by the government to finance the country's bank
recapitalization program. The burden will be even greater if the
government has to spend more to recapitalize banks that are badly
affected by the soaring interest rate.

Banks have also complained that the higher interest rate had
created difficulties for them to restructure the huge non-
performing loans (NPL), which according to Bank Indonesia's
ruling must be reduced to the 5 percent level by the end of this
year.

But Sjahril reaffirmed that Bank Indonesia would not impose
the 5 percent NPL requirement this year, although banks must
still meet the year-end minimum 8 percent capital adequacy ratio
or risk closure. (rei)