Experts Snub IMF Call to Up BI Rate

Jakarta Globe, Dion Bisara, October 23, 2011

Related articles

• Good Prospects in an Uncertain World 9:38am Oct 18, 2011
• Indonesia Could Face Economic Crash, IMF Warns 8:17am Oct 14, 2011
• Editorial: Inflation in Check? Let There Be Lending 9:29am Oct 13, 2011
• Emerging Markets Brace for Global Slowdown 10:32am Oct 12, 2011
• BI Likely Will Keep Key Interest Rate Steady: Analysts 10:04pm Oct 9, 2011

Economists say Bank Indonesia should not bow to the International Monetary Fund’s suggestion late last week that the central bank should raise its key interest rate to counter accelerating inflation next year.

Indonesian economists contacted by the Jakarta Globe on Sunday said inflation was less of a concern than ensuring growth remained on track.

The IMF said on Friday that BI should be ready to tighten monetary policy because the government’s plan to reduce energy subsidies could push inflation above the central bank’s target — 4 percent to 6 percent this year —and as credit growth accelerates.

“BI will need to contain inflationary expectations and limit second-round effects from energy price increases,” the IMF said in its annual review of Indonesia’s economy. The IMF projected Indonesian inflation at around 6.5 percent in 2012, given the government’s plan to cut electricity subsidies.

The central bank, betting on weaker prices for commodities, estimates inflation at below 5 percent next year, which prompted it to cut the benchmark rate by 25 basis points to 6.5 percent on Oct. 11. Inflation in September slowed to 4.61 percent from 4.79 percent in August.

Despite concerns of a pick-up in inflation, Indonesia’s economy is solid, the IMF said, and a slump in the global economy would be needed to shake up the country’s growth momentum. Indonesia’s government forecasts economic growth to accelerate to 6.7 percent in 2012 from 6.5 percent this year. In 2010 the economy expanded 6.2 percent.

“Therefore, there is little risk that monetary policy tightening will cause an unintended economic downturn,” the fund said.

However, economists highlighted that IMF has been incorrect so many times about projected growth in the largest economy in Southeast Asia.

“We have our own considerations and priorities, which I think BI has captured well in its latest rate-cut policy,” said Purbaya Yudhi Sadewa of the Danareksa Research Institute.

“The IMF had advised the same thing back in 2008, which we didn’t heed. It turn out we did alright, so I don’t believe we have to listen this time,” he said.

In December 2008, the central bank had reduced the rate, despite IMF advice to raise it.

Inflation has been historically high for Indonesia, yet the nation’s economy manages to grow, at least in recent years.

In 2008, when the global financial crisis was starting to affect Indonesia, the country’s inflation rate was above 11 percent, but the economy grew at a 6.1 percent pace.

BI cut its rate in December 2008 and the nation’s economy expanded by 4.5 percent in 2009. Indonesia was among just a handful countries to grow that year, Purbaya said,

He said next year’s inflation would be tame, at between 5 percent and 5.5 percent, as the global economic slowdown would result in weak prices for commodities such as crude oil.

Ahmad Erani Yustika, an economist at the Institute for Development of Economics and Finance, feared the IMF was acting on behalf of developed countries and big investment funds.

“I think they just want high-yield instruments to park their money next year,” Erani said.

“However, I think there’s room for BI to lower its interest rate further.”