BI introduces new inflation scheme

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.