B

ank Indonesia (BI) and the Energy and Mineral Resources Ministry agreed on Monday to the quick exchange of information, in a deal that will enable the central bank to access the ministry'€™s fuel data updates to support its monetary policy.

The central bank needed access to information in the energy and mining sector because any developments in the area would have an impact on the country'€™s monetary policy, BI deputy governor Perry Warjiyo said during the announcement in Jakarta.

'€œThis agreement will help providing input for us in the formulation of our monetary and macroprudential policies, especially in Bank Indonesia'€™s management of inflation and exchange rates,'€ he said after the signing of the agreement.

The government'€™s fuel-price policy is an important determinant on inflation, ultimately influencing the direction of domestic interest rates set by the central bank, which adopts an inflation-targeting monetary policy stance.

Inflation reached double-digit figures in 2005 (17.1 percent) and 2008 (11 percent) when the government hiked the prices of subsidized fuels to cope with a spike in oil prices . Last year, inflation rose to 8.4 percent after President Joko '€œJokowi'€ Widodo hiked fuel prices to ease pressure on the state budget brought by fuel subsidies.

In this case, BI wanted to implement a preemptive monetary policy in its efforts to become a '€œforward-looking'€ central bank, added Perry.

Since BI Governor Agus Martowardojo took over that bank'€™s leadership in 2013, BI has taken a preemptive approach to reining in inflation. The central bank, for example, responded to the government'€™s fuel-price hikes in June 2013 and November 2014 with 50-basis point and 25-basis point hikes in the BI rate, respectively.

Posing a challenge for an effective monetary policy is the Energy and Mineral Resources Ministry, which has given more questions than answers regarding the outlook of the fuel-subsidy policy. The ministry has kept fuel prices low despite the government'€™s initial pledge to allow them to float freely based on oil and exchange-rate developments.

The current price for 88-octane Premium gasoline of Rp 7,300 (54 US cents) per liter was estimated to be 25 percent lower than its actual price of Rp 9,250, according to government estimates.

Economists have said that uncertainty over the issue has contributed bearish sentiment to the rupiah, whose 8 percent depreciation this year is the worst in Asia.

'€œThe fuel-price setting is one of the important factors determining the movement of the rupiah,'€ noted Perry, adding that the exchange rate was also influenced by import-export activities in the oil and gas industry.

The World Bank has cited a '€œlack of transparency'€ in the government'€™s fuel-price setting mechanisms that might consequently affect domestic inflation expectations, as well as external investors'€™ perceptions of the country.

'€œThe gap between subsidized and non-subsidized fuel is again widening, which means the government is back to subsidizing fuel prices,'€ said Sean Yokota, an analyst with Swedish investment bank SEB.

The government'€™s confusing stance on its fuel-subsidy policy might have made the fiscal situation worse, he warned.

'€œWith the recent oil price bounce and weaker currency, the automatic hike has morphed into partial and negotiated hikes. Also, confusions have emerged on what products are covered and not covered [by the fuel subsidy policy],'€ he wrote in an email.