No 'shock measures': BI governor
No 'shock measures': BI governor
JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono assured yesterday that the government would never again use "shock measures" to curb the impact of economic overheating.
He said that the "no shock measure" policy had been clearly stated during the early stage of the present cabinet and that "I and the minister of finance have reached a firm commitment not to adopt such a policy".
The central bank governor was speaking to journalists after inaugurating members of the Indonesian Bankers' Institute, a non- profit organization founded by Indonesian bankers.
"We have been working for three years and as you see, no such measure has been taken," Soedradjad said when he was asked about what measures the government might take to cool down an overheating economy.
Former finance minister J.B. Sumarlin and Soedradjad's predecessor Adrianus Mooy were widely criticized for their "shock measures" in dealing with economic overheating. In 1990, the Mooy-Sumarlin duet ordered the withdrawal of over Rp 8 trillion (US$4 billion) in state firms' money from the banking system in a bid to cool down the economy. They converted the huge amount of funds into Bank Indonesia Certificates (SBIs).
The measure, popularly called "Sumarlin's shock", prompted a spiral increase in deposit interest rates to over 25 percent per annum from around 20 percent previously.
Soedradjad, who was appointed as the central governor in early 1993, acknowledged that there are currently signs of economic overheating in the country.
However, he was sure that the inflationary pressure would remain flat even though there was a sharp increase in the money supply in the first nine months of this year.
Soedradjad said that the inflation rate, already recorded at 7.43 percent in the January-October period, was expected to reach less than nine percent this year, as compared to 9.24 percent in 1994.
He said that last year, the monthly inflation rate in November and December stood at 0.45 percent and 0.52 percent, respectively.
The inflation rate in the remaining two months of this year is expected to be around one percent.
The money supply grew by over 26.5 percent in the first nine months of this year, far higher than the 21.5 percent increase in the 1994-1995 fiscal year, as the result of the excessive increase in bank credits.
Soedradjad said that the central bank would continue to use its SBIs to curb the amount of money in circulation.
"Of course, we have to increase the interest rates on SBIs to make them more attractive to buyers," he said. He denied that any rise in the interest rates of SBIs would automatically push up interest rates on time deposits offered by commercial banks.
"It is the market which will determine the levels of deposit rates," he said.
Soedradjad said he hoped that interest rates would remain stable at their current levels for the next few months, given the favorable level in the inflation rates in the last 10 months.
The average interest rates for three-month deposits have stayed between 17 percent and 18 percent in the last four months.
Chairman of the Federation of Private Domestic Banks Trenggono Purwosuprodjo was also upbeat that interest rates will likely remain stable in the next three months.
He said that in the short term, interest rates might stay at their current levels in conformity with the trends overseas.
"The recent decision of the U.S. Federal Reserve not to raise its discount rates is very positive," he said.
Trenggono said that the government's ability to check the inflation rate at below nine percent this year could also discourage the rise of interest rates.
Local and foreign economists are of the opinion that the central bank will have no choice but to raise the interest rates on SBIs to cool down the economy. (hen)