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)