BI is unlikely to reduce the benchmark rate

JAKARTA. Bank Indonesia (the Central Bank) reiterated the monetary policy shift from the bias easing to be a more restricted policy, due to a more restricted space for monetary easing.

A restricted space for monetary easing was driven by the domestic inflation potentials and external dynamics, mainly the dynamics in the US (United States of America).

In other words, the policy shift implies that BI is unlikely to reduce the benchmark interest rate. Governor of BI Agus Martowardojo said, the electricity subsidy cut, the adjustment of motor vehicle registration administration fees, the adjustment of fuel price, and the plan to implement single fuel price have contributed to the inflation on the administered prices in this year.

The electricity tariff and fuel price adjustments are part of subsidy reform, which aims at maintaining a healthy fiscal condition. However, those have affected to the inflation rate. “We have to control the inflation properly,” Agus said, Friday (3/2). Therefore, BI and the government will focus on controlling the inflation of volatile prices, as well as the core inflation.

On the external sides, BI is monitoring the US’ fiscal and trade policies, which will affect the global economy. BI also remains alert of The Fed’s plan to increase the interest rate. Let alone, the US’ economic indicators, such as economic growth, inflation rate, and unemployment rate were not as good as expected.

BI expects that The Fed’s policy would not be as aggressive as before. Nonetheless, Agus admits that BI will remain alert as the increase in The Fed’s rate would be affecting to the cost of borrowing rise within the next three years. “Therefore, in general we adopt caution accommodative monetary policy,” he said.

Below 5%
Previously, Deputy Governor of BI Perry Warjiyo said that BI still has adequate space of monetary easing, thanks to a more conducive global condition. This related to The Fed’s policy, which was less aggressive than expected. However, the space for monetary easing will be adjusted to the potentials of national inflation rise in 2017.

According to Perry, BI will no longer use the benchmark interest rate as an instrument to boost economic growth. The instrument of interest rate, along with exchange rate instrument and the surveillance will be directed to maintain the financial system stability. Meanwhile, the BI will utilize the instruments of liquidity, macro prudential, and payment system to boost the economic growth.

Head of the Economists of Bank Mandiri Anton Gunawan predicts that the inflation rate in this year will be higher compared with the last year. Last year, the inflation rate was 3.02%, while the inflation rate in this year will be more than 4,1%-4,2% on year on year (yoy) basis.

The estimation has included the contribution of electricity tariff rise at 0.6%-0.8% to the inflation rate. However, that figure has not included the potential of fuel price adjustment to the increase in global crude oil price.

Anton is optimistic that inflation rate in this year can be controlled to be lower than 5% if the fuel price is adjusted. If the inflation rate exceeds 5%, BI is likely to automatically increase its 7-day reserve repo rate.

Anton added, if the inflation rate exceeds the target, BI may intervene by increasing the benchmark interest rate if the central bank is consistent in implementing its monetary policy. (Muhammad Farid/Translator)