Higher interest rate is not enough to curb imports

JAKARTA. Newly elected Bank Indonesia (BI) senior deputy governor Mirza Adityaswara said an increase in the central bank's benchmark interest rate (BI Rate) needed to be supported with tighter fiscal policies in order to effectively control imports.

“We have to control imports, but it cannot be carried out merely by imposing a higher benchmark interest rate," said Mirza after a plenary meeting at the House of Representatives in Jakarta on Tuesday, as quoted by Antara news agency.

"Even if it was possible, the interest rate increase would have to be very high. This is not wise, isn’t it?”

According to Mirza, Indonesia’s imports, particularly of fuel, had been too high and needed to be cut.

“The most crucial problem in our current account is oil and gas imports. So, the short-term policy we need is one that reduces them,” said Mirza.

“The long-term policy is how we can find alternative energy sources other than fossil fuels. This is a must,” he added.

Indonesia has seen a decline in exports due to decreasing commodity prices.

Mirza predicted that the prices of commodities would increase again, but only in the next two or three years. “After China and India’s economies improve, then the prices of commodities will increase again,” he said.

When asked about possible increases in the central bank’s benchmark interest rate, Mirza said the facility rate (FasBI) and BI Rate were recently increased by 25 basis points to 5.50 percent and 7.25 percent, respectively, which would adequately cover inflationary pressures in 2014. (ebf)