BI aims to cut inflation to 6-7% in five years

The Jakarta Post, Jakarta

Bank Indonesia said in its 2001 annual report released on Thursday that it was committed to gradually lowering the inflation rate to between 6 percent and 7 percent in the next five years.

The central bank, however, did not provide details on how it would achieve the target.

Lowering inflation, after the country was hit by hyper inflation of more than 77 percent in 1998, has been one of the main goals of Bank Indonesia.

Lower inflation would help improve the country's investment climate, an important condition for sustainable economic recovery.

The central bank has targeted inflation -- basing its monetary policy on achieving a set level of inflation -- as its major policy. This is achieved by targeting the supply of money, setting an actual inflation objective or managing the exchange rate.

But analysts have said that although Bank Indonesia has become an independent central bank since May 1999, inflation targeting will still be difficult to implement because of the considerable political and private sector pressures.

The high interest rate policy set by Bank Indonesia last year, for instance, was strongly criticized by the government and the business sector.

The government wants the interest rate to be low to minimize the burden of covering the interest rate of bonds issued to recapitalize banks. Meanwhile, the business sector needs cheaper bank loans for working capital.

Elsewhere, Bank Indonesia said that it was maintaining its earlier forecast for this year's macroeconomic outlook including economic growth of between 3.5 percent and 4 percent, inflation of between 9 percent and 10 percent, and an exchange rate of the rupiah against the U.S. dollar at between Rp 9,500 and Rp 10,500.

The central bank said that consumption would continue to be the main mover of the country's economic growth this year, although the current high inflation environment would make consumption growth slower than last year.

Bank Indonesia also said that the country was expected to book a current account surplus of around US$3.1 billion this year, although it would be lower than the level in 2001. These assumptions, BI said in the report, were based on the higher expected growth of imports than exports.