BI rate policy on track: IMF

Berni K. Moestafa, The Jakarta Post, Jakarta

Despite concerns of higher than expected inflation, the International Monetary Fund (IMF) expressed support for Bank Indonesia's policy of lowering interest rates and allowing inflationary pressures to rise.

Visiting IMF senior advisor for the Asia Pacific department, Daniel Citrin said on Wednesday he had reviewed Bank Indonesia's monetary policy.

"The base money policy is on track ... and so far their interest rate policy has been appropriately cautious," he told reporters after meeting the Oversight Committee of the Indonesian Bank Restructuring Agency (IBRA).

Citrin is leading an IMF team that arrived in Jakarta last Thursday on a two week mission to review the progress made in meeting economic reform targets under the Letter of Intent (LoI).

The LoI requires Bank Indonesia to contain the growth of base money in the market to an annual average of 12 percent to 14 percent.

Base money is the money in circulation, plus current accounts and deposit accounts kept at banks.

Keeping interest rates high helps absorb excess liquidity from the money market that could otherwise inflation and increase pressure on the rupiah.

But Bank Indonesia has been reducing its benchmark rates since early this year, sending rates last week down to 16 percent from 17 percent for the first time in seven months.

On Wednesday, the weighted average interest rate on one-month Bank Indonesia SBI promissory notes slid to 16.91 percent from 16.93 percent the week before.

The central bank is hoping to contain inflation at between nine percent and 10 percent this year.

There has been concern however that it may not meet the target, as inflation was already running at 1.9 percent last month. And prices are still creeping up.

The biggest contributors to last month's inflation rate were the increases in fuel prices, and power and telephone charges.

Analysts warned that the recent widespread floods across the country would keep inflation rates high this month, due to disruptions in the supply of goods.

They estimated inflation this month could well hit between 1.5 percent and two percent because of the impact of the floods.

That could spur inflation for the two month period to nearly half the rate Bank Indonesia hopes to maintain for the whole of this year.

More inflationary pressures loom on the horizon, as the holiday seasons in November and December often trigger across-the-board price hikes.

Still, Bank Indonesia Governor Sjahril Sabirin played down inflation worries, and said its current target range was attainable.

Citrin concurred, and said there was no need to revise any of the monetary targets in the LoI.

Risking allowing inflation to grow unchecked would hurt consumer spending, which as yet remains the only economic driving force.

However, last year Bank Indonesia came under fire for choking investment growth due to its high interest rate policies.

Industry argued that keeping the rates high had driven up the cost of borrowing from local banks, making investment expensive.

Prior to the 1997 financial crisis, private investment had been a large contributor to economic growth.

Lower rates would also ease the state budget burden as a large amount of government bond coupon rates are tied to the central bank's rates.

The 2002 state budget assumes an annual average Bank Indonesia's benchmark rate of 14 percent, compared to the current 16.91 percent.

Meanwhile, inflation should range between nine percent and 10 percent, with the rupiah averaging 9,000 against the U.S. dollar.