BI defends inflation target amid doubt
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.