Heavy duty awaits the Management of Bank Indonesia, after price increase of subsidized fuel. Only weeks ago, BI had to face the great task of stabilizing Rupiah value against USD. As known, all through the year Rupiah value weakened, hitting the bottom line at Rp10,000 per USD.
Effort were made by BI to protect Rupiah so Rupiah managed to be rescued from the Rp10,000 per USD trap. One of the protective measures was market intervention by BI exercised at extremely high cost, i.e. draining national forex reserves as much as around ISD 1.5 billion.
Now another complex problem had to be faced by BI soaring inflation as the government announced oil price increase on June 21 last. As told, one of the side effects of fuel price increase was soaring inflation directly or indirectly creating widespread anxiety.
The first step taken by BI was to increase the Fasbi BI rate by 25 bps from 4% to 4.25%. The next step was to increase BI benchmark rate by 25 bps from 5.75% to 6%. The to initial steps by BI was mentioned as an aggressive step in response to soaring inflation as prices of goods and services including transportation, jumped up tremendously.
BI dared to take the action because the trigger of inflation was monetary factor, i.e. increase price of subsidized oil which belonged to the category of administered price. By theory one of the ways to tame inflation was by increasing BI rate.
So far BI’ step had been notably successful. The only thing was that BI’ policy to increase BI rate, which was followed by Deposit Insurance Institution [LPS] increasing interest rate by 25 BPS to become 6% would bring the consequences of increased bank interest.
The chain effect of BI’ step had to be anticipated, the way it happened when the government increase price of subsidized oil in 2015 and 2008. By empiric record, at least transition period of 3-6 months was needed before things turn back to normal. Thereafter inflation would ease down, to be followed by lowering of BI rate and LPS rate and containing to lowering of bank interest.
On thing was to be understood was that for the short run, efforts to control inflation could not be simply by relying on monetary strategies. In this case it was necessary for BI to collaborate with the government, central and local. This step was most important top prevent inflation, especially during the Ramadhan fasting month and Idul Fitri in the near future.
The role of the Regional Inflation Controlling Team [TPDIP] in some regions made it easy for BI to coordinate. This was in line with BI’s effort to control inflation at the level of 7.67%. From the government side, the effort to maintain inflation at 7.2% was in line with the assumptions APBN-2013, i.e. by ensuring that national food suppy was well secured.
As known, inflation upjump in the first month of this year was on account of undersupply in horticulture products like red onion, garlics, chilli, soy, and sugar. Fortunately there was deflation in April and May last as supply was well under control. The government’s decision to import was that the government ensured distribution of goods to run smoothly by way of down pressing transportation cost.
So far contribution of volatile food commodities to inflation was around 0.19% and yet if there was undersupply of food, inflation could be bigger than BI’s estimate. The projected inflation of 7.67% set by BI was inclusive of increased price of premium and solar oil, which contributed 1.23%, transportation tariff contributed 0.82% and other commodities 0.40%.
The future tendency was that inflation as projected by various economic researchers, analysts and economist was around 7.2% - 8.2%, so it seemed that BI’s monetary step was still expected to put brakes on inflation. Predictably BI would still use BI rate and Fasbi as instruments so control inflation.
Next July, most probably would again increase Fasbi and BI rate each by 25 bps to become 4.5% and 6.25% respectively as inflation was almost certainly to be around 1.5% - 2.0%. So simultaneous increase of BI rate and Fasbi was expected to be effective in meeting three objectives, i.e. to strengthen Rupiah, to control inflation after oil price increase and to regain market confidence.
For information, Fasbi was facility given by BI to banks who placed their fund in BI. The tenure of Fasbi was maximum 7 days since date of transaction until due date. Fasbi was not tradable, not valid as guarantee and not soluble before due date.
The effort to control inflation and to stabilize Rupiah value would be truly effective if the government made various efforts to ensure smooth flow of goods and services, especially through the holiday season in June-July and Idul Fitri festivity in August.
Price increased was bound to happen but it was more important to make sure that supply of essential needs was not distributed. Road repairs must be accomplished so as to avoid distribution hindrances and extra transportation cost. The government must also make sure there was no brokers and speculators who played with market prices. Therefore it would be necessary to monitor trade centers directly to see if there was any speculator in action.
Law enforcement on speculators, who played with prices of essential need to burden people, was now indispensable since increase of fuel price had jacked up prices of nearly all commodities. (SS)
Business News - June 28,2013