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)