BI to maintain tight monetary policy

JAKARTA (JP): Bank Indonesia said on Wednesday it would continue its tight monetary policy and allow a further increase in interest rates to help curb inflationary threats and strengthen the rupiah.

The central bank said in its second quarter report that the tight money policy was aimed at achieving the base money target.

Bank Indonesia admitted, however, that the increase in interest rates could threaten the country's economic recovery efforts.

"We realize that the tight policy and higher interest rates could hinder the nascent economic recovery," the statement said.

Bank Indonesia cautioned that a high interest rate environment would also inflate the government's bank recapitalization cost and impede the debt restructuring program.

But the central bank also conceded that a monetary policy which tended to be "accommodative" would create a higher inflation expectation.

"This condition has created a policy dilemma," the bank said.

The benchmark interest rate on one-month Bank Indonesia short- term promissory notes (SBIs) increased to 12.69 percent at Wednesday's weekly auction, compared to 12.33 percent the previous week. This is the ninth consecutive weekly increase, and the highest rate level since late last year.

The central bank initially predicted that the benchmark interest rate would be between 10 percent and 12 percent by the end of this year.

But Bank Indonesia has been forced to allow interest rates to increase over the past two months amid an increase in interest rates by the U.S. Federal Reserve and the weakening of the rupiah.

The rupiah ended lower at Rp 9,385 per U.S. dollar late on Wednesday, compared to Rp 8,960 on Tuesday, which is much lower than the government target of Rp 7,000 for this year.

The central bank has said that the current weakening of the rupiah has been largely due to domestic political uncertainty, particularly in the run up to the General Session of the People's Consultative Assembly in August.

Bank Indonesia expected interest rates to go down again after August, along with lesser pressure on the rupiah.

The central bank said that despite the current inflationary pressure, the 5 percent to 7 percent inflation target for this year was still within reach as long as political uncertainty subsided.

The central bank said that inflation this year would be spurred by the weakening of the rupiah, an increase in government-administered prices and "supply shocks" (supply disruption) if political and security conditions deteriorated.

The report said that economic growth in the third quarter of this year was expected to be between 3 percent and 4 percent.

It said that consumption would continue to be the largest contributor, while investment growth would still be relatively slack, as in the previous quarter.

Bank Indonesia added that government spending, which was still contradictory in the previous quarter, was expected to be expansive in the third quarter.

It added that the current account transactions in the third quarter would still be in a surplus condition although it would be slightly lower compared to the previous quarter due to higher imports.

Bank Indonesia said that it would continue to let the market determine the exchange rate of the rupiah against the dollar.

The central bank said that market intervention through the selling of its dollars would be done selectively and in a limited amount. (rei)