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BI boss to balance stability, growth
Succession: Newly installed Bank Indonesia (BI) Governor Perry Warjiyo (left) is congratulated by his predecessor Agus Martowardojo during his inauguration ceremony at the Supreme Court in Jakarta on Thursday
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uccession: Newly installed Bank Indonesia (BI) Governor Perry Warjiyo (left) is congratulated by his predecessor Agus Martowardojo during his inauguration ceremony at the Supreme Court in Jakarta on Thursday. Perry will serve his tenure until 2023. (Antara/Sigid Kurniawan)
The newly inaugurated Bank Indonesia (BI) Governor Perry Warjiyo will face a herculean task in solving the central bank’s policy dilemma between maintaining currency stability and pushing for economic growth amid ongoing global pressures.
Perry took an oath at the Supreme Court on Thursday, replacing Agus Martowardojo who retired from his position, and stated he was ready to lead the central bank for the 2018-2023 period.
Perry reiterated his commitment to maintaining the rupiah’s stability as an immediate priority, while also seeking to implement the best policies to support the economy.
“BI will prioritize its pro-stability mandate, but also seeks opportunities to support pro-growth policies,” he said after the swearing-in ceremony in Jakarta, hinting at a hawkish stance going forward.
On stability, Perry seemed firm in continuing the stance of his predecessor, as he said BI would be more preemptive in its monetary policy and “ahead of the curve” in driving its benchmark interest rate.
The central bank raised its policy interest rate — the seven-day reverse repo rate — by 25 basis points (bps) to 4.5 percent after a two-day board of governors meeting on May 17, which was led by Agus Martowardojo, while hinting at the possibility of further hikes in an effort to stabilize the rupiah.
The 25 bps rate hike, however, was unable to stem the rupiah’s depreciation. The rupiah traded at Rp 14,205 per US dollar according to the Jakarta Interbank Spot Dollar Rate on Thursday, slightly weaker that the Rp 14,192 seen a day earlier.
Perry said BI would continue intervening in both the currency and bond markets to stabilize the rupiah, also called a dual-intervention policy, citing data that the central bank had spent almost Rp 50 trillion (US$3.52 billion) in the secondary government bond market.
While pursuing market stabilization, BI would soon reach out to the banking industry and business to disseminate its policies, particularly on its measures on the rupiah, Perry said.
Perry was confident that the interest rate hike would not thwart economic growth in the short term, stressing that BI would instead push for economic growth through other policy instruments. Among his plans are polishing macroprudential and payment system regulations, encouraging an active financial market and developing an Islam-based economy.
Perry argued that loan requirements should be relaxed, particularly in housing, as it was a leading sector that would create a trickle-down effect on the overall economy.
Separately, Samuel Sekuritas economist Lana Soelistianingsih said BI should be more hawkish in its monetary stance to stabilize the rupiah and thus make room for pro-growth policies.
“The quicker BI achieves stability, the more room it has to focus on its pro-growth policy,” she said, projecting that BI would increase its policy rate two more times this year to stabilize the rupiah.
Lana said a more aggressive move for stability would help shape BI’s pro-growth policy to compensate for possible economic stagnation next year caused by a hawkish rate stance, as maintaining a stable currency would spur confidence among businesspeople before they could take loans and expand their business.
In fact, Lana argued, policy transmission would be quicker during a period of monetary tightening.
Meanwhile, Eric Sugandi, an economic observer at the Asian Development Bank Institute, urged BI to evaluate its previous pro-growth policies to assess their effectiveness. Eric was also confident that a 25 to 50 bps rate increase this year would not negatively affect economic growth.
Bank Central Asia chief economist David Sumual voiced a similar opinion, in that more rate hikes were necessary to stabilize the rupiah, projecting another 25-bps rate hike after the board of governors meeting in June.
David said BI’s policies aimed at pushing credit growth during the last three years was dampened by weak loan demand, as he suggested more structural reforms were needed to encourage the real sector to take on more loans.
