BI defends inflation target amid doubt

Dadan Wijaksana, The Jakarta Post/Jakarta

The central bank expressed optimism on Friday that the newly unveiled long-term inflation target of 3 percent was "within reach" amid the nation's relatively improved macroeconomic condition.

Aslim Tadjudin, Bank Indonesia deputy governor, stated that even though the target was for a ten-year period, the inflation rate could likely be reduced to 3 percent in the next five to seven years.

"I am optimistic as our macroeconomic indicators are stable. With discipline in implementing monetary policy, the target is within reach," he said.

He was quick to add, however, that it would take place at a gradual pace, so as not to create shocks to the market and harm the economy. He did not go into detail on the specific steps to be taken to meet that target.

For this year, the inflation rate was assumed to average 6.5 percent and the 2005 assumption is 5.5 percent.

The Ministry of Finance and Bank Indonesia announced on Thursday that they had decided on the long-term inflation goal of 3 percent in hopes of making the country's economy more competitive.

The government has said that the setting up of a target for such a long period is not only aimed at promoting transparency on the part of the monetary authority in its policy directions, but more importantly was aimed at providing confidence for the market and business community.

The target should be a guideline to determine how the economy is doing, and thus make it easier for industry players to adjust and draw up their own long-term business plans.

However, the Institute for Development of Economics and Finance (Indef), a private think tank, acknowledged the importance of the inflation goal, but doubted that a target of 3 percent could be reached.

"It means, in the next ten years, inflation has to be reduced by 0.4 percentage points each year, something questionable if the government's track record -- which could only manage to contain inflation at around 7 percent -- is taken into account," Indef director Iman Sugema told the press on Friday.

In July, year-on-year inflation increased to 7.20 percent mainly due to the weaker rupiah.

Iman added that with the lingering inflationary pressure at the moment, there was some doubt whether the government's year- end inflation target of 6.5 percent could be achieved.

"It's hard to keep inflation in check if the rupiah remains highly volatile," Iman said, referring to the local unit's weak performance against the U.S. dollar.

The rupiah has weakened by around 8 percent since the start of the year.

According to Aslim, however, the fundamentals of the local currency remain strong and that its recent volatility has been caused by non-fundamental factors, including market concerns stemming from the general election process.

The impact however, was considered minor, he added.

"The rupiah is currently hovering around 9,200 against the U.S. dollar. So far so good, although there is a little uncertainty leading up to the second round of the presidential election (on Sept. 20)," Aslim added.