Bank Indonesia Sends Mixed Message

March 8, 2012

Bank Indonesia began the post-Great Recession process of normalizing interest rates much later than most central banks in Asia.  From December 2008 through August 2009, the policy reference rate had been slashed by 300 basis points to 6.5%, and an initial rate hike was not undertaken until February 2011.  That move had no follow-up second increase and instead was reversed eight months later in October as global growth risks were mounting.  In November, the rate was cut again, only this time by 50 basis points to 6.0%, and a third easing to 5.75% was implemented just last month. 

The reference rate was not reduced again this month.  A statement from central bank authorities reaffirms that the global economy has slowed and notes the presence of "prolonged uncertainty" still overhanging global financial markets.  But a different concern is expressed over the potential impact of the planned government reduction of fuel subsidies on inflation, and the parting message of the statement is that officials are ready to tighten if required to contain that risk.  "Going forward, Board of Governors will continue to be vigilant on the impacts of government policy regarding energy and the impacts of global economic slowdown on Indonesian economy. Bank Indonesia will optimize various policies to minimize temporary inflation impacts of government policy regarding fuel subsidy, and controlling inflationary pressure going forward in line with fundamental conditions and the inflation target. …Although there is a tendency of inflation to go beyond the target due to temporary impact of government policy on fuel subsidy, with various policy implemented by Bank Indonesia and the coordination with the government, Bank Indonesia is confident that inflation in 2013 will return to its range of 4.5% ±1%."  On-year CPI inflation as of February was at the low end of that target range, 3.56%, and growth is running around 6.5%.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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