Friday, February 8, 2008

Indonesian Rates Unchanged Despite Increasing Inflation Target

by Michelle Roberts

The Central Bank of Indonesia retained the standard interest rates even for the second month even when it had increased the inflation target for the current year. The Indonesian governor Burhanuddin Abdullah along with his colleagues retained the rates which are the reference rates for the bill sales staying at eight percent, the statement by the Bank Indonesia said. This move by Indonesia was expected by economists. Bank Indonesia had increased its half a percentage point in its inflation target for the current year which was mainly done by the government for reigning in increasing prices of food in the country. This measure by the government also failed to reign in the rate of inflation which shot to a record 16 month high in January. The prices are increasing all over Asia which in turn prevents all the central banks of Asia to go after the U.S. Federal Reserve in order to cut the costs of borrowing.

Economists like Lim Su Sian are also of the opinion that the rates of Bank Indonesia will remain like this in the coming months. However, the risks are that the inflation might overpower the inflation target the central Bank has set for the current year. Bank Indonesia, the central bank of Indonesia hiked its inflation target to 6.5% for the current year and the same according to its previous estimate was 4% to 6%. The economic growth forecast that the Bank has set for itself for the current year is 6.2% to 6.8%. According to economists, the monetary mechanism of the central bank of Indonesia is finding it increasingly difficult to fight inflation.

The rising inflation is not only the worry of Indonesia, but also of the whole of Asia and the cases prove the fact. Consumer prices in the Philippines recorded rapid increase in fifteen months; the central bank of Australia also increased its standard interest rate which was by a quarter percentage point. This measure by the Australian central bank was the highest such increase in eleven years to fight inflation which recorded a rapid pace since the year 1991.

The Indonesian government in order to control the prices of food planned to raise the tax on levied on crude palm oil exports which is to be 25% so that the domestic supply can be encouraged. The government also wrote off the five percent duty levied upon imported wheat flour. The ten percent VAT or value added tax was also granted on wheat imports.

An economist in Jakarta also said that unless fiscal policies for reigning in the rise of prices in commodities give their results inflation will continue to remain high. The decision of Bank Indonesia to increase its inflation target is the sign that the monetary methods of the bank are not enough to cool down the rising inflation in the region. The banks move to keep the rates as it is also helps to improve the Indonesian rupiah and slow down inflation that is imported. In the past three months the rupiah suffered a decline of 1.5% but again gained by 2.5% following the reduction in the borrowing costs by the Fed.

 

 

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