New Zealand helps BI check inflation

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)