Meeting of the Board of
Governors of BI on November 18 2014 stipulated to solidify the policy mix to
synchronize with Governor’s policy to increase oil price.
Firstly to increase benchmark rate by 25 bps to become
7.75% with increased Lending Facility by 5- bps to become 8.00% and to maintain
Deposit Facility at 5.65% to be effective per November 19, 2014.
Increased BI rate was felt necessary to anchor down inflation
expectation and make sure that inflation caused by oil price increase reminded
under control, temporary, and be within target of 4% - 1% in 2015.
The policy was also synchronous with the effort to manage
deficit in current transaction toward healthier state. Increase of benchmark
rate was intended to ensure liquidity sufficiency and to intensify probing on
the money market.
Secondly, to prepare for making adjustments in macro
prudential policy for expanding financial resources for the banking sector and
to intensify penetration on the moneymarket and to step up credit pipelining to
prioritized sectors.
The policy included among others redefinition of deposits
by including promissory notes issued by banks based on loan-to-deposit ratio
[LDR] in the Minimum Mandatory Giro Policy –LDR and incentive-giving to enhance
pipelining of credit for UMKM small business.
Thirdly to improve payment policy system to smoothen the
process of Government aid extention for the people to cushion the shock of oil
price increase through e-money and Digital Financial Service.
Fourthly to continue stabilization process of Rupiah in
accordance with Indonesia’s fundamental economy. The oil price policy was
believed to strengthen current transaction.
Fifthly to foster coordination with the Central and
Provincial Government in the effort to minimize inflation effect especially in
terms of transportation tariff increase and food price, coordination was also
intensified to strengthen fiscal stimulus to productive sectors.
BI believed that strengthening of policy mix and sound
coordination would help to stabilize macro economy, and ensure sustainable
growth.
BI also welcomed Government’s fiscal reformation to
reallocate budget to productive sectors. This fiscal reformation policy was a
fundamental step in strengthening Indonesia’s fundamental economy.
In spite of price increase for the short run, BI’s policy
mix was belived to keep inflation under control and temporary. The policy mix
could reduce import and narrow deficit in current transaction.
As a whole, BI believed that economic growth in 2015
could reach 5.4% - 5.8% and could be higher in the medium and long range with
macro economic stability and well managed financial system.
The conclusion was that the above BI 5 step was an effort
to control inflation and betterment of deficit-to-current transaction to around
3% against GDP. BI’s view was apparently different from people’s opinion.
Economist circles believed that BI’s policy to increase
BI rate from 7.5% to 7.7% would provoke hard reactions from businesspeople and
bankers. They rated that BI deliberately continued tight money policy with the
effect of worse economic slowdown followed by increase of bank interest.
Increase of BI rated had been quite significant for the
past 13 months since November 2013, interest level today was even highest since
2009. As always, BI argued that the policy to increase benchmark rate was
intended to put brakes on inflation, save Rupiah and minimize import.
So BI’s intention was noble by theory, the objective was
justifiable, but the chain effect resulted was not as tolerable as the aim.
It should be observed that to increase benchmark rate
could pose as boomerang unless done the measurable way amidst bad expectation
of economy. There was mounting anxiety because BI rated was increased not at
the right momentum.
Not just that, a high benchmark rate as such tightened
liquidity not supportive to growth process. It was not wrong to say that BI
benchmark rate set as 7.75% was the highest central bank benchmark rate in the
world, a disincentive factor to economic growth.
The question was: until when would BI increase BI rate?
Or how long would this tight money policy last? By the time the Government was
passionate to boost economic growth, BI held back the effort by increasing benchmark
rate. The public could rate there was disharmony in the relationship between
the Ministry of Finance and Fiscal Authorities.
Fiscal authorities were still certain economy could be
jacked up higher by spurring on power, but on the contrary Financial
Authorities tend to put brakes to progress to prevent inflation. In that case
President could use his authority to adopt a pro-growth strategy without
sacrificing monetary stability. The strategy of “stability above growth” must
be reserved into “growth above stability”. (SS)
Business News - November 26, 2014
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