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.