BI to maintain tight monetary policy in 2006
BI to maintain tight monetary policy in 2006
The Jakarta Post, Jakarta
Bank Indonesia will maintain its tight monetary policy next year
to curb inflationary pressure, the central bank's governor
Burhanuddin Abdullah said on Wednesday.
Speaking a day ahead of the expected release of inflation data
for November, he said the cost of living was likely to remain
high next year due to a fuel price hike in October as well as
other price hikes.
"In response to this, Bank Indonesia expects to maintain its
tight bias monetary policy for now," Abdullah was quoted by
Agence France-Presse as saying at a seminar hosted by University
of Indonesia's School of Economics.
Bank Indonesia has been steadily raising its key interest rate
this year to ease inflation and defend the rupiah. Its one-month
benchmark rate now stands at 12.25 percent, compared to 7.42
percent in January.
The government raised fuel prices on Oct. 1 by an average of
126 percent to relieve some of the pressure caused by crippling
state fuel subsidies after global oil prices struck historic
highs.
The hike drove October inflation up 8.7 percent month-on-month
and 17.89 percent from a year earlier. The results were much
higher than expected.
"Until August next year, year-on-year inflation should stay at
about 15 percent," Abdullah said, adding that the central bank's
"key interest rate will follow inflation."
He said he expected inflation to drop after August, bringing
full-year 2006 inflation to seven percent to eight percent.
Speaking at the same seminar, State Minister for National
Development Planning Sri Mulyani Indrawati noted that the
government would match Bank Indonesia's tight monetary policy
with more government spending to keep economic growth on track.
"In the fourth quarter of 2005, growth tends to slow down as a
result of high inflation. We will reverse this with more fiscal
spending," Sri Mulyani said.
She explained that increased government spending would extend
to the first quarter of next year using funds carried over from
the 2005 budget.
She noted that the government had plenty of unspent money from
the 2005 budget due to late disbursements as a result of repeated
budget amendments at the legislature.
As monetary policy would remain tight until the third quarter
of next year, the government will match it with more expansionary
fiscal spending until then by implementing planned development
projects in the 2006 budget.
"As a result, the deficit is expected to be slightly higher
than that stated in the 2006 budget, but such an increase in the
budget deficit would remain within our debt sustainability
corridors," Sri Mulyani said, adding that the deficit would be
maintained at below 1 percent of the gross domestic product
(GDP).
Sri Mulyani explained that the government would finance the
deficit by mostly issuing government bonds, on both the domestic
and foreign markets, as the country could no longer rely on
foreign loans. The amount drawn on foreign loans next year will
be lower than government spending on foreign debt repayment, Rp
35.1 trillion (about US$3.5 billion) as against Rp 63.6 trillion.
Despite the issuance of new debt, the minister explained, the
government would keep its long-term commitment to bringing down
its debt stock from the current level of about 48 percent of GDP
to 39.5 percent in 2007 and 31.8 percent in 2009.