BI introduces new inflation scheme

The Jakarta Post, Jakarta

In an attempt to better manage inflation in accordance with Indonesia's improved macroeconomic indicators, the central bank will implement a new, "forward-looking" inflation target scheme next month based on interest rates.

Bank Indonesia (BI) governor Burhanuddin Abdullah said on Thursday the new scheme -- dubbed the BI rate -- will replace the central bank's previous "backward-looking" scheme based on controlling the circulation of the country's base money.

"The scheme will allow us to have a more stable forecast of inflation, which will be the anchor of all our monetary policies," BI governor Burhanuddin Abdullah said on Thursday.

"The BI rate, as well as the rupiah exchange rate, will all be managed in the context of maintaining inflation."

Explaining the scheme further, BI deputy governor for monetary affairs Hartadi A. Sarwono said the BI rate would refer to the interest rate of the central bank's one-month SBI promissory notes.

"The BI rate will be determined in every quarterly meeting of the BI board of governors," he said, adding that the next meeting will be held on July 5. "The rate will carry a variation of a 25 basis point margin, with the possibility of revision according to developing circumstances during the board's monthly meeting."

Hartadi added that the scheme was chosen as an analysis showed that the relationship between the SBI rate and inflation was now more closely linked and a more appropriate indicator in view of the country's recent economic advancement, than that of the base money.

Following the 1997 Asian financial crisis, Indonesia -- on the advice of the International Monetary Fund -- implemented the basic "inflation targeting lite" scheme amid uncertainties in the country's monetary policies back then.

As Indonesia's macroeconomic condition and banking industry stabilized, however, the scheme -- which controls inflation by absorbing excess base money liquidity -- has now become irrelevant as the supply and demand of base money has become more complicated and less directly connected to inflation.

By determining the SBI rate, meanwhile, the interest rates of banks and the prospects of businesses in the country are expected to be influenced, and in the end the inflation rate.

BI raised on Wednesday its one-month SBI interest rate seven basis points to 8.25 percent, from 8.18 percent last week, absorbing Rp 39.38 trillion (some US$4.1 billion) from the market during the day's auction of the notes. The three-month SBI rate still stands at 8.05 percent, from 7.81 percent in May.