TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
BI sticks to 'stability over growth' policy
Agus Martowardojo - JPIndonesiaâs central bank, Bank Indonesia (BI), will continue to focus on stability over growth policy, despite the decrease in the inflation rate in recent months
Change Size
Agus Martowardojo - JP
Indonesia's central bank, Bank Indonesia (BI), will continue to focus on stability over growth policy, despite the decrease in the inflation rate in recent months.
BI Governor Agus Martowardojo said on Monday a near-term cut in the interest rate was unlikely, although easing inflation could give the central bank leeway for lower rates.
'We must be cautious. We have to consider the mid-term outlook if we want to change our stance and we have to recognize that there is still external volatility,' he said during a visit to The Jakarta Post's office.
BI has maintained a tight monetary stance by keeping its benchmark interest rate at 7.5 percent since February, even though calls have been mounting to lower the rate to revive the economy.
Agus was upbeat that even if was the rate unchanged for now, the economic growth target of 4.7 to 5.1 percent this year and 5.1 to 5.5 percent next year would be met, thanks to a series of economic policy packages launched by President Joko 'Jokowi' Widodo's administration recently.
The central bank governor attributed global volatility to a possible increase of the Fed Fund Rate (FFR) in the US, a further slowdown in China's economy and a continuous slump of raw commodity prices. As reported before, the US Federal Reserve has expressed its intention to gradually jack up the FFR following the end in its quantitative easing (QE) program.
The FFR has been maintained at 0.125 percent since 2008 and is estimated to rise to 0.25 percent by the end of the year. The interest rate is expected to continue climbing to an average of 1.12 percent in 2016, 2.62 percent in 2017 and 3.62 percent in 2018, according to a median projection published by BI.
The change in the Fed's monetary policy could spark massive capital outflows from emerging countries, including Indonesia. In fact, foreign funds have begun to decline since early this year, as reflected by BI's latest data on capital flows.
The amount of foreign holdings in Indonesian stocks, government debt papers (SBN) and BI certificates (SBI) totaled Rp 35.16 trillion (US$2.57 billion) from January until Nov. 5, well below the Rp 182.6 trillion recorded during the same period in 2014.
In addition to sluggish foreign fund inflows into the country's financial markets, export earnings also dropped significantly due to the persistent drop in commodity prices and the economic slowdown in China, Indonesia's main trading partner. These unfavorable conditions, Agus noted, posed a challenge to the country's balance of payment (NPI).
BI expects that the situation will lead to an NPI deficit of $4.57 billion in the third quarter, up significantly from a deficit of $2.93 billion in the second quarter. The central bank is scheduled to publish the third-quarter NPI on Friday.
Given the current condition of the country's balance of payment and growing risks resulting from the possible rate hike in the US, it would be quite risky for BI to lower its benchmark rate.
'If we are careless in setting the interest rate, for example by lowering it, the exchange rate of the rupiah will immediately plummet. This is difficult to explain to the public,' Agus said.
The last time BI cut the rate was in February, when it unexpectedly slashed the rate by 25 basis points to 7.5 percent from 7.75 percent in January. The move resulted in the rupiah dropping 0.8 percent against the greenback the following day.
'What is ideal is maintaining macroeconomic stability at a time like this. This is the job of Bank Indonesia. The government can maintain our fiscal stability, consistently carry out reforms and improve the real economy. This will create confidence.'
Agus' stance on keeping the interest rate high came amid repeated calls from Vice President Jusuf Kalla and recently from Coordinating Economic Minister Darmin Nasution for the central bank to lower the rate amid easing inflation pressure.
Agus argued that although year-on-year inflation stood at 6.25 percent in October, it would not fuel optimism for lowering the interest rate.
'Inflation is at 6.25 percent while our interest rate stands at 7.5 percent. There is a 1.25 percent margin that makes many people happy. That sounds competitive if we hold US dollars in which the return is around 0.75 percent. But the margin on the rupiah will not be that attractive because the dollar will have the chance to appreciate by 10 percent or more. Given this uncompetitive future margin on the rupiah, there are risks in lowing our interest rate,' he said.
'We should be cautious and consider the medium term situation. Risks still engulf the global market, our inflow of dollars is still low and exporters are still reluctant to convert their proceeds to rupiah. If we are not careful, we will be in trouble,' he said.
Gareth Leather, economist for Asia at macroeconomics research firm Capital Economics, previously said that he expected the interest rate to be cut before the end of the year to provide a boost to growth with the economy growing at its weakest pace since the global financial crisis.
______________________________________
To receive comprehensive and earlier access to The Jakarta Post print edition, please subscribe to our epaper through iOS' iTunes, Android's Google Play, Blackberry World or Microsoft's Windows Store. Subscription includes free daily editions of The Nation, The Star Malaysia, the Philippine Daily Inquirer and Asia News.
For print subscription, please contact our call center at (+6221) 5360014 or subscription@thejakartapost.com
