Easing monetary policy poses risk, BI official says
Easing monetary policy poses risk, BI official says
SINGAPORE (Reuters): A relaxation of monetary policy at this point in time posed enormous risks although high interest rates had not brought about a recovery in the ailing rupiah, an Indonesian central bank official said on Thursday.
Miranda Goeltom, one of Bank Indonesia's managing directors, said in a speech for a conference in Singapore that tight monetary policy had to continue in line with rising inflation.
"Tight monetary policy is needed, and therefore, will be continued," Goeltom said.
She said high nominal interest rates and a tight monetary stance would be maintained until the rupiah stabilized at a level reflecting the country's fundamentals.
On several occasions Indonesia has raised its key interest rates to rein in inflation while keeping the rupiah attractive.
It had also suspended instruments with expansionary effects such as the auction of money market securities (SBPUs). Efforts to loosen monetary conditions would pose "enormous risks at present," Goeltom said.
Under current conditions, lowering interest rates would make the rupiah depreciate, inducing fund withdrawals from the banking system and fueling inflation, she said.
Goeltom said the domestic socio-political situation and regional crisis had also weighed on the rupiah.
She said the government had no intention of implementing foreign exchange controls to remain consistent with its open capital account policy.
"A consistency in implementing an open capital account is extremely vital, particularly in the time of crisis. Changing the system towards...so called foreign exchange control is very dangerous," Goeltom said.
She said the word "control" should indeed be avoided in the midst of thin confidence.
"It will tend to discourage private capital inflow that is very much needed as a vote of confidence, thereby deteriorating the rupiah exchange rates," Goeltom said.
But she said a too free capital account policy would also have unfavorable impacts on the economy.
Goeltom suggested further tightening of net open positions, "restriction of forward selling to non-residence, allowance for earning assets (and) prohibition of credit for non-residence" were among the aspects worth considering as part of a comprehensive risk management system.
She said a policy to increase the repatriation of export proceeds was necessary to increase the supply of hard currency. But a compulsory surrender of export proceeds could be avoided by under-invoicing exports or over-invoicing imports.
Goeltom said such a system could work if direct government financial support or a sweetener such as providing cheaper than market swap premium rate, or a guarantee of hard currency availability to exporters was given.
As a possible means to sterilize destabilizing inflows, she touched on the idea of the imposition of an effective tax rate on inflows, particularly the shorter term money.
Goeltom said a system of a float within a moving intervention band was one alternative tool to stabilize the rupiah.
But she said the system was not applicable for Indonesia for now because it could only be effective if the macroeconomic- sociopolitical situation was stable.