BI to shift monetary policy to IT system

JAKARTA (JP): Bank Indonesia gradually plans to shift its current multitarget monetary policy to a single inflation target policy, according to central bank deputy governor Achjar Iljas.

Achjar said on Friday Indonesia needed another three years before its central bank could fully implement the so-called inflation targeting (IT) system.

"Indonesia needs another two to three years to implement the IT system. We still have a lot of homework to do," he told journalists following the closing of a two-day international seminar on inflation targeting sponsored by the International Monetary Fund.

Bank Indonesia's current multitarget monetary policy focuses on the exchange rate and price stability. Achjar said with the IT system, the central bank's single objective would be price stability, while exchange rate fluctuations would only be addressed if they were perceived as a threat to its inflation target.

"But based on the experience of other nations, there's a correlation between the adoption of the IT system and exchange rate stability in the long run," he said.

Achjar said a precondition for implementing the IT system was a credible independent central bank which could not be forced to plug the government's fiscal deficit.

He said Law No. 23/1999 on the independence of Bank Indonesia provided the legitimacy for the adoption of the IT system as the central bank's monetary policy framework.

But Achjar said that in the case of Indonesia, there were several issues which still had to be settled, particularly the political will and commitment of the government, the legislature and the public.

"Looking forward, we (Bank Indonesia) have to move from a legal independency to an actual (operational) independency," he said.

Other issues which also must first be addressed, according to Achjar, include the weak banking system, high fiscal deficit, slow progress in resolving the country's overseas debts, the volatility of the rupiah and weak coordination between the government and the central bank in achieving inflation targets.

"But so far, the experience of other countries which have adopted the IT system shows quite a high degree of success in achieving price stability," he said.

The IT system was first developed by New Zealand in 1990. This monetary policy framework has now been adopted by a number of developed and developing nations, including England, Canada, Australia, Spain, Sweden, Finland, Israel, Brazil, Chile, South Africa, Poland, South Korea and Thailand.

The two-day seminar was attended by domestic and foreign experts, including representatives of foreign central banks and institutions.

Achjar said Bank Indonesia had begun taking steps toward the implementation of the IT system, including the regular publication of its monetary targets and the results of its board of governors meetings. (rei)