Policy of the Jokowi Government in increasing oil price had its high consequences; one of them was soaring inflation.
Although inflation data release by BPS in 2014 had not shown any significant increase [1.5%] it was almost certain that the fruits of oil price increase would be seen in 2 or 3 months after oil price increase. A course as this happened before last year when the Government increased oil price on June 22 2013. The result was 8.28% inflation by year end.
In responding to inflation upjump, the general policy adopted by BI was to use bank interest as instrument, i.e. to increase BI rate by 25 basic points from 7.75% to 7.75%. hopefully this was the highest increase and let there be no more increase in national industry.
Many circles rated that this 7.75% BI rate was the highest benchmark rate in the world. Even to compare with other developing countries BI Rate was still the highest. Hopefully banks would not respond to it by increasing credit interest as it would bring negative impact on businessplayers or even the banks themselves.
Today the most important thing was to keep industry running. In short, productivity must be maintained. People’s purchasing power must not be down because it would keep consumption at dafe level.
It was right for President Joko Widodo to attend to the poor people through social aid program since they were the most vulnerable to the effects of oil price increase. The Keep Buying Strategy became important when export was not something to rely on.
In terms of inflation control, BI’s strategy to increase BI rate was in fact only partial solution problem. Some observers even rated that BI had over acted by increasing BI rate in responding to Government’s step to increase oil price to set administered princes. BI should have tried to detect the root of problem and troubleshoot them the effective way.
BI’s step increase BI rate only solved the problem on the demand side, assuming that increased BI rate would force banks to increased BI rate would force banks to increase deposit their money in banks instead of being consumptive. A scenario as such would ease inflation but only on the demand side.
In fact Indonesia’s structural problem was not on the demand side, but supply side. Therefore it was the Government’s job to solve problem on the upstream side; BI could not only rely on bank interest as instrument.
What BI need was in fact long-term remedy to cure inflation. This task could be done by BI as inflation controller by the right approach to problem especially through the real sector. The biggest contributor to inflation on the food category, the biggest contributor to inflation which increased to 2.15% against the previous year. In this case the Government must supply enough food at home and depend less on import.
Even if some survey unveiled that food-based inflation was not always related to law of supply-demand but rather commerce that needed Government intervention, it still had to be managed by the Government, not BI.
The formation of Regional Inflation Controling Team [TPO] was the right solution to tackle inflation threat in the regions. BI’s Representative Office in every province, together with all Provincial officials could be mobilized to scure stock of food so inflation could be controlled. This was in line with the latest inflation data which showed that cities with highest inflation like Padang [3.44%] and Tual [2.86%] were outside Java.
Therefore the Government with BI must maintain price stability especially in certain times like Idul Fitri or Christmas and students holiday season. BI was most concerned about controlling inflation in accordance with the anchor set, i.e. 4.5% + 1%. With additional inflation of 2.4% - 2.8% after oil price increase, BI must be optimistic inflation could be kept around 6.9% - 7.3%.
One of BI’s efforts to control inflation till end of 2014 was to make sure inflation of volatile food and core inflation was not affected significantly. BI was also coordinating with the inflation controlling team at center and provincial level, as well as the Provincial Governments to prevent Second Round Effect after oil price increase.
In 2015, inflation was predicted to be in the range of 4% + 1%. In 2016 inflation could reach the level of 3.5% + 1%. Low inflation as in 2011 [3.8%] and 2014 [4.3%] resembles the condition in the Philippines, Malaysia and Thailand. If inflation could be kept lower, there was chance that BI rate could be gradually lowered to around 6% - 6.5%.
By the above picture, it was expected that BI did not just rely on bank interest as instrument to control inflation but to use non interest instrument instead, for example with policy mix which had been proclaimed. It was noteworthy that to keep high interest for the long run would have its negative effect on economic growth.
High interest restricted expenditure for investment and consumption which held back economic growth, even economy might stagnate causing problems in time to come. The dilemma was not due to tight money policy itself but in the step to increase benchmark rate. Even if it was effective it was only for the short term.
In the ling run high interest directly affected economic growth negatively. No matter how strong, economy could not withstand extremely high benchmark rate. Businesspeople screamed for help since BI increased benchmark rate.
It was right for BI to hold coordinative meeting to discuss for strategic step related to inflation stabilization in the Jakarta Province. Firstly to develop Information Center for Strategic Food Price [PIHS], secondly to foster trade collaboration with regions supplying strategic food commodity. Thirdly to build infra structure which supported trading and logistics. Fourthly to support development of UMKM small business sector.
Dour strategic steps being discussed in the Coordinative Meeting were needed to ease inflation pressures in Jakarta. As known, high inflation pressures in Jakarta today originated mainly from inflation in food. The price stabilization effort by TPID of the Jakarta Province was constantly strengthened, among others by developing PIHPS as priority program 2013.
PIHPS would ease information access for all people, enhance prices transparence and efficiency in setting price at consumer and product level. Besides, there would be Regional Business Board who had the authority to stabilize prices – such was to support food reserve program and price affordability of strategic food in Jakarta. (SS)
Business News - December 10, 2015