BI to maintain tight money policy amid uncertainty

BI to maintain tight money policy amid uncertainty

JAKARTA (JP): Bank Indonesia deputy governor Miranda Goeltom
said on Monday that the central bank would continue with its
tight monetary policy by raising the interest rate amid the
current inflationary threat.

"Underlying inflation is really on the verge of a serious
level," Miranda said on the sidelines of a seminar.

"We have no other options other than to keep tightening
monetary policy," she added.

She explained that the government's plans to raise fuel
prices, electricity rates and the value added tax, combined with
a weakening rupiah and domestic political uncertainty, were
serious threats to inflation.

She said that Bank Indonesia would only start lowering the
interest rate once there were clear signs of pressure on the
rupiah and inflation easing.

The central bank has allowed the benchmark interest rate on
one-month Bank Indonesia SBI promissory notes to keep increasing
over the past few months in a bid to tame inflation and help
defend the rupiah.

In contrast to this trend, Bank Indonesia lowered the rate to
16.30 percent last Wednesday, from 16.31 percent the week before.

The inflation rate, on a year-on-year basis, has been at
around 10 percent during the past couple of months, raising
concern that single-digit inflation targeted for this year may
not be achieved.

Some bankers have called on Bank Indonesia to lower the
interest rate to avoid negative spread, which could lead some
banks into a relapse of crippling financial problems. Negative
spread occurs when a bank's revenue sources are outweighed by its
cost of managing funds.

The government has also appealed to the independent central
bank for the lower rate because the higher rate could further
burden the state budget. The budget covers interest costs
associated with the massive amount of government bonds issued to
finance the country's bank recapitalization program.

"Monetary tightening will deliver lower costs in the medium to
longer term, although it will be painful in the short term,"
Miranda said.

The rupiah has been under pressure over the past couple of
months, partly due to the escalating domestic political tension.
Last month, the local unit plunged to a 31-month low of around Rp
12,300 per U.S. dollar.

A drop in the value of the rupiah increases the prices of
domestic goods as the country's manufacturing sector is heavily
dependent on imported raw materials, thus creating inflationary
pressure.

Meanwhile, the rupiah declined slightly to Rp 11,588 per
dollar late on Monday, compared to Rp 11,430 on Friday, amid
increasing domestic political tension.

The House of Representatives has vowed to proceed with its
plan to request a special session of the People's Consultative
Assembly (MPR), which has the power to instigate impeachment
proceedings against President Abdurrahman Wahid.

The House is set to convene on Wednesday to determine what
course of action it will take.

Asked to comment on the impact of Wednesday's House session on
the rupiah, Miranda said: "I cannot say what the impact will be,
but it is clear that the current situation is filled with
uncertainty and cautiousness."

Separately, the private Econit Advisory think tank said that
Bank Indonesia should not be too aggressive in raising the
interest rate because inflation had not yet reached an alarming
level.

Econit deputy managing director Hendri Saparini said on Monday
that the central bank's high interest rate would not be effective
in curbing inflation and stabilizing the rupiah because the
problem was politically related.

Hendri said that the high interest rate policy would only
create new difficulties for local banks and create more strain on
the state budget.

Econit urged the central bank to start reconsidering its
costly high interest rate policy. (rei)