Discount rate raised
Discount rate raised
Bank Indonesia's decision to raise its discount rate by 0.25
point last Friday following the 0.50 point rise in the U.S. Fed
key interest rate is indeed essential to preventing another wave
of currency speculation.
Another aspect, however, is the fact that the measure will
obviously hurt small and medium-scale banks which, unlike the big
banks that have ample access to the inter-bank market, rely
largely on the central bank's short-term funds. But because both
the Fed move and Bank Indonesia's reaction were widely expected,
the impact of the 0.25 point rise on the prevailing interest
rates will not likely be overly significant.
Moreover, because most banks raised their deposit rates by
between one to two percentage points last month, the latest rise
in the central bank's key rates -- the second after the 0.50
point increase in the middle of last month to defend the rupiah
against speculation -- will not necessarily force another
increase in the deposit and lending rates.
Also, the central bank's measure is timely for providing the
right signal to the market, especially after the speculative
pressure on the rupiah three weeks ago as fallout from the
financial crisis in Mexico.
The right signal, as well as consistency and predictability of
the central bank's monetary policy, are crucial because the
country pursues a free foreign exchange regime and the exchange
rate of its rupiah is floated against a basket of major foreign
currencies. In such a situation, the central bank cannot afford
to have its interest rate (monetary) policy independent from its
exchange rate management as the international interest rates,
notably those in the United States, have direct influence on the
domestic currency market.
However, the subsequent developments in the interest rates
still depend on the expectations for inflation this year. The
government has pledged to check inflation throughout the year at
less than six percent. Based on this target, the rupiah
depreciation against the American dollar is envisaged at four
percent at the most for the whole year.
We have often heard the government state its determination to
curb the inflation rate at a single-digit level. For sure, a
single-digit level has been achieved over the last two years --
9.77 percent in 1993 and 9.24 percent in 1994 -- but those
figures tottered on the brink of the two-digit level.
Many analysts are doubtful that inflation can be checked at
the government's targeted level in view of the inflationary
pressures from the recent rise in civil service salaries and the
increase in the regional minimum wages and mandatory Idul Fitri
bonus payments to workers. In fact, the inflation rate was
already 1.16 percent in January. Although that rate was not
unusual, because the first month of the year usually posts the
highest monthly rise in the consumer price index due partly to
the government-mandated annual increase in the producer rice
price, the price increases in January were still worrisome. We
think the achievement in checking the rate of inflation for the
first quarter will be quite crucial for the success of the anti-
inflation measures, especially in view of the seasonal price
rises during the Moslem fasting month this month and the Idul
Fitri holidays next month.
Bank Indonesia's Governor Soedradjad Djiwandono has been doing
his share in the anti-inflation drive by tightening the money
supply. But, as he frankly admitted at a hearing with the House
of Representatives last week, monetary measures, although very
important, are only one of the components of the anti-inflation
program. The central bank's efforts will be rendered less
effective than possible if the distortions and hurdles in the
production and distribution sectors are not removed or at least
minimized. Hence, the pivotal role of new packages of
deregulation measures and bureaucratic reform.