Monday 12 January 2015

THE UNDERLYING REASON WHY BI INCREASE BENCHMARK RATE



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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