BI rate policy on track: IMF

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.