Central Bank warns monetary condition must be monitored

JAKARTA (JP): Bank Indonesia warned on Wednesday that the current development in retail prices and in the rupiah must be carefully watched to avoid missing the inflation target set for this year.

Bank Indonesia deputy governor Achjar Iljas said that domestic interest rates may have to be raised further if the rupiah continued to weaken and prices increase faster than expected.

"We have to be more careful. We don't want inflation to be higher than the target," he said at a weekly news conference.

"A trend of higher interest rates is inevitable under the current conditions. But we don't want to see interest rates increase drastically because that would put a heavy burden on the economy, and they would be difficult to reduce once already high," he added.

He pointed out that the central bank had worked very hard to bring down the interest rate of the Bank Indonesia one-month SBI promissory notes from a record 70 percent level in August 1998 to the current low level.

"We hope the desired monetary stability can be achieved without the expensive cost of high interest rates," he said.

The interest rates on one-month SBI notes rose for the fifth consecutive week at Wednesday's auction to 11.13 percent, up from 11.07 percent at the previous week's auction, which the central bank said was largely due to the weakening of the rupiah.

The interest rate on three-month SBI notes also increased to 11.09 percent, up from 10.91 percent last month.

Achjar said that necessary monetary measures had to be taken immediately because of its direct impact on inflation.

"We can't raise interest rates now and expect inflation to fall next month. There's a certain impact," he said.

The rupiah has weakened over the past month due to a combination of domestic political and social problems, and the recent increase in U.S. Federal Reserve interest rates.

The local currency closed lower at Rp 8,630 per U.S. dollar on Wednesday compared to Rp 8,575 on Tuesday. The government exchange rate target for 2000 is Rp 7,000 per dollar.

Achjar said the weakening rupiah would contribute to a higher inflation level because imported goods would cost more.

He said Bank Indonesia had been "optimal" in its efforts to try to stabilize the local unit through a combination of selling its dollars and raising the interest rates of its SBI notes.

But he said that monetary measures alone could not strengthen and stabilize the rupiah because domestic political uncertainty and security problems throughout the country had been a major factor in causing the value of the rupiah to fall.

Achjar said the central bank was now evaluating various statistics to decide whether it needed to revise its inflation and other monetary targets amid the current weakening of the rupiah and rising prices.

"We're still waiting for the June data to come out with a firm decision," he said, adding that the central bank was optimistic that its initial inflation target for this year was still within reach.

Bank Indonesia has targeted inflation to be in the range of 3 percent to 5 percent this year, and 5 percent to 7 percent if the increase in the government administered prices was taken into account.

Inflation in May was 0.84 percent compared to 0.56 percent in April, sending the January to May inflation level to 2.35 percent.

May's inflation was largely due to an increase in government administered prices including electricity and transportation, and in the market-driven prices of high-end fuel products.

The government has said it would raise lower-end fuel prices by an average 12 percent in October.

Meanwhile, Bank Indonesia deputy director for monetary research and policy Hartadi Adi Sarwono said the first quarter economic growth (year-on-year) was 3.21 percent, lower than the 5.01 percent in the same period last year.

Hartadi said this was largely due to the greater than expected contraction of the agriculture sector and lower growth in the mining sector.

But Hartadi said there was reason for optimism because growth in the manufacturing sector was higher than expected at 7.17 percent compared to the initial estimate of 5.78 percent.

"The central bank still expects the economy to grow by between 3 percent and 4 percent in 2000," he said. (rei)