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.

Jakarta Post

Editorial: Focusing on growth

Taking advantage of the current benign inflation outlook, Bank Indonesia surprised most analysts last week by cutting its policy rate by 25 basis points (bp) to a record low of 5

The Jakarta Post
Wed, February 15, 2012

Share This Article

Change Size

Editorial: Focusing on growth

T

aking advantage of the current benign inflation outlook, Bank Indonesia surprised most analysts last week by cutting its policy rate by 25 basis points (bp) to a record low of 5.75 percent in a concerted bid to invigorate domestic consumption and further boost the economy which last year grew a respectable 6.5 percent.

The strongest message of the monetary move, the third surprise rate cut after the 25-bp reduction last October and 50-bp slash in November, is that the central bank is now focusing more on growth, rather than being worried too much about inflation risks and the potential impact on the rupiah.

The central bank seems to believe that inflation will remain within the 3.5-5.5 percent target range even though several analysts foresee stronger inflationary pressures from energy and food prices. It also appears to discard any significant fallout from the slump in Europe and the United States, and shows confidence that the economy will continue to expand at 6.5 percent in the first quarter and between 6.3 and 6.7 percent between April and December.

Most analysts forecast that inflation will accelerate if the government goes ahead with its energy reforms to bar private cars in Java and Bali from using subsidized gasoline and raising the electricity rate by 10 percent beginning on April 1. Higher inflation would certainly weaken the rupiah, which in turn would increase the risks of imported inflation (higher import prices).

Indonesia depends largely on imports of sugar and wheat, soybean and corn. It also imports more than 2.7 million tons of rice.

The risk of inflation will loom in the next few months and inflation expectations will become unanchored if energy and food prices continue to rise even though inflation was checked at 3.65 percent in January.

But the latest monetary measure could be the right preemptive move to spur growth as the global recovery weakens only if commercial banks follow with lower lending rates.

Theoretically, the easing of the money policy will boost credit expansion and lower lending rates, which are currently still twice as high as those in other major ASEAN economies. This in turn will fuel a higher pace of domestic consumption, currently the main locomotive of growth, to offset the impact of the weaker external demand for Indonesian exports caused by the economic slump in the US and government debt crisis in Europe.

But Bank Indonesia should ensure that the lower reference rate would not stoke inflationary concerns among foreign portfolio investors. It would be better if the central bank could controlled inflation expectations below 5 percent.

It is also most imperative for the central bank to maintain the rupiah in the range of 8,500-9,000 against the greenback amid the highly volatile international market because a significant depreciation of the local unit will raise inflationary pressures.

Yet most important is for the central bank to see to it that this lower policy rate would be transmitted by commercial banks into to lower lending rates, otherwise the easing of the monetary stance would not be effective in boosting credit expansion to fuel a higher pace of economic activities.

But the central bank cannot do it alone. The government should also continue reforms to cut down the costs of doing business as high business risks expose companies to debt defaults and, consequently, banks to the risks of nonperforming loans.

{

Your Opinion Matters

Share your experiences, suggestions, and any issues you've encountered on The Jakarta Post. We're here to listen.

Enter at least 30 characters
0 / 30

Thank You

Thank you for sharing your thoughts. We appreciate your feedback.