One day before its board of governorsâ meeting, Bank Indonesia (BI) has stated that it will remain independent in deciding the course of monetary policy as political pressure mounted on the central bank to lower interest rates against a backdrop of lower inflation and slowing growth
ne day before its board of governors' meeting, Bank Indonesia (BI) has stated that it will remain independent in deciding the course of monetary policy as political pressure mounted on the central bank to lower interest rates against a backdrop of lower inflation and slowing growth.
'BI is still independent. Our independence is guaranteed by law,' Deputy Governor Ronald Waas said at his Jakarta office on Monday.
BI's top executives will meet in a monthly board of governors' meeting (RDG) on Tuesday to decide its monetary policy setting.
Pressure for the central bank to lower the BI rate from the current level of 7.75 percent is high after earlier this month President Joko 'Jokowi' Widodo summoned BI Governor Agus Martowardojo to discuss the high interest-rate.
Meanwhile, Vice President Jusuf Kalla has also publicly suggested that the central bank relinquish its tight-bias monetary policy stance and assist the government in spurring growth.
Nevertheless, while BI's executives have consistently emphasized the need for high interest rates to maintain economic stability, Ronald refused to comment on whether BI would maintain its tight-bias policy stance, which has drawn criticism from local businesspeople struggling against tight liquidity and costly credit.
'Just wait for the RDG tomorrow, when our stance will be announced,' Ronald said.
BI has won acclaim among international investors for hiking interest rates earlier than other central banks, with the Indonesian monetary authority deemed to be ahead of the curve after it lifted the interest rate by a cumulative 175 basis points in 2013.
However, the central bank's policy standpoint also drew opposition from top government officials seeking to spur economic growth, especially its latest move to hike the BI rate further by 25 basis points to 7.75 percent in November 2014, which was perceived as one dose too many of monetary tightening.
Low reference rates would make bank rates lower and encourage lending, hence spurring economic activity, while high rates discourage lending and incentivize bank customers to park their funds in deposits.
Economists have said that the central bank might have room to lower the BI rate this year, given the backdrop of declining inflation and slowing economic growth.
This month, Indonesia's Central Statistics Agency (BPS) announced that inflation had fallen to 6.9 percent in January while economic growth slowed to 5 percent in the fourth quarter.
'With the elimination of fuel subsidies we think disinflation will be the long-term trend in Indonesia,' said Tim Condon, an economist with ING Bank, which forecast that the central bank would cut its rate by 50 basis points this year.
However, other economists also stressed the importance for BI to maintain its independence and resist political pressure to cut interest rates, given the prevailing uncertainty that could pose a risk for countries with high current-account deficits, such as Indonesia.
BI is guaranteed independence in adjusting its monetary policy in the 2004 Bank Indonesia Law ' a revision to the 1999 law ' and its executives are obliged to reject any form of interference from government officials when making decisions.
'Independence is of course very important, because there needs to be a division between fiscal and monetary policy,' said Gundy Cahyadi, an economist with DBS Bank in Singapore.
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