BI maintains rate to ward off downturn

Aditya Suharmoko and Abdul Khalik ,  The Jakarta Post ,  Jakarta   |  Fri, 04/04/2008 1:18 AM

Shadowed by the highest inflation rate in 18 months during March, Bank Indonesia kept its policy rate unchanged Thursday to help prevent an economic downturn.

In its regular monthly meeting, the central bank board maintained the benchmark interest rate at 8 percent.

"With a high inflation rate, we cannot raise the interest rate further as it will trigger a rise in prices. This will eventually hurt people's purchasing power," BI senior deputy governor Miranda S. Goeltom said in a press conference.

Since the 1997 Asian financial crisis, Indonesia's economy has been heavily dependent on domestic consumption due to dwindling foreign direct investment and diminished exports.

A decline in people's purchasing power due to higher prices will hurt the economy, which is expected to grow by 6.4 percent this year, up from 6.3 percent last year.

During the year's first quarter inflation reached 3.41 percent, more than half the government's target of 6.5 percent.

According to the Central Statistics Agency, the main factor contributing to stronger inflationary pressure was rising food prices. Global prices for some key commodities -- wheat, soybeans, corn, palm oil and rice -- have sharply increased to record highs this year, fueling anger across the globe.

Miranda said BI would try to cushion inflation by keeping the rupiah rate stable against the U.S. dollar in a bid to reduce import costs.

"We will try to reduce rupiah volatility," she said.

According to BI, the rupiah had declined by 1.1 percent in the past month, driving import costs up, especially for food.

BI said the rupiah was traded at an average of Rp 9,258 during the first quarter this year. The government set the rupiah at Rp 9,100 in the revision of the 2008 state budget.

The central bank also reported the money supply in January rose by 16.5 percent from the same period last year, slowing from 18.9 percent in December, signaling that current high inflation did not originate from an excess in liquidity.

Despite vowing to contain inflation and maintain higher economic growth, President Susilo Bambang Yudhoyono has not yet come up with any breakthrough measures to translate his pledge into reality.

"I would like to say people and the markets should remain calm because everything is under control," Yudhoyono told reporters after an unscheduled meeting with key economic ministers at the Presidential Palace.

Yudhoyono said the government would continue to help lower income residents cope with rising food and energy prices through greater subsidies and increased fiscal stimulus for the private sector.

In response to a perceived increase in the risk of sovereign bonds, Finance Minister Sri Mulyani said "the market should not worry".

"If the market needs reassurance from the government, we are ready to buy back the bonds," she said.

The Indonesian stock index fell to a six-month low on Thursday due to concern soaring inflation -- the highest in Southeast Asia after Vietnam -- might trim economic growth, leaving more people unemployed.

The Jakarta Composite index shed 104.22 points, or 4.5 percent, to close at 2,237.97.

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