New Zealand helps BI check inflation

JAKARTA (JP): Reserve Bank of New Zealand (RBNZ) will advise Bank Indonesia on achieving a low-inflation economy under a memorandum of understanding signed here on Tuesday.

Bank Indonesia Governor Sjahril Sabirin said New Zealand's central bank was noted for its success in devising and executing its own monetary policy to attain a low-inflation level, currently in a range of zero percent to 3 percent.

"We want to learn from the success in New Zealand," he told reporters after accompanying his New Zealand counterpart Donald T. Brash in a meeting with President B.J. Habibie. "The Reserve Bank of New Zealand has been able to control inflation at between zero and 3 percent... That's also what Indonesia wants to achieve."

Indonesian consumer prices dropped by 0.18 percent in March from the previous month, the first monthly deflation since last October.

The Central Bureau of Statistics said March's figures brought the 1998/1999 fiscal year inflation level to 45.44 percent, below the government target of 66 percent.

Government officials welcomed the downward trend as a sign the economy was cooling off after the rupiah meltdown pushed the annual inflation level to more than 77 percent last year.

Skyrocketing inflation has forced the central bank to tighten its monetary policy, causing interest rates to soar to more than 70 percent at one stage last year.

The high interest rate environment has been a major hindrance, particularly for the business sector already devastated by the economic crisis and a glut of bad bank loans.

Analysts warn it could stymie the government's bank recapitalization program because a negative interest rate spread would eat up new equity funds injected into the banks.

Bank Indonesia director Miranda Gultom said on Monday declining inflation provided more room for domestic interest rates to continue to decrease.

Interest rates on one-month Bank Indonesia promissory notes could decrease to 30 percent if positive developments in macroeconomic and banking conditions continued, she said.

Miranda warned, however, that the central bank would be "very careful" on the interest rate policy because hasty measures could prove counter-productive.

"If the rupiah continues to stabilize and inflation continues to ease, there's a big possibility for the interest rate to decline to 30 percent," she said.

Interest rates are currently about 37.42 percent. Many market participants expect the rate to decrease in the central bank's scheduled weekly auction on Wednesday.

Sjahril said cooperation with RBNZ was also important in anticipating implementation of new central bank legislation, which would require Bank Indonesia to achieve and maintain the stability of the rupiah through its monetary policy.

The bill is currently under deliberation by the House of Representatives, which is expected to give its approval on April 16. It stipulates Bank Indonesia's banking supervisory role will be handed over to a new independent body in 2002. (rei/prb)