BI to maintain tight monetary policy

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)