Sunday, January 16, 2011

Bank Indonesia Ready for Rate Rise to Stem Inflation

Francezka Nangoy | January 14, 2011
Bank Indonesia Governor Darmin Nasution, pictured, said on Friday that the central bank was prepared to raise interest rates for the first time since 2009 due to rising inflation. (Bloomberg Photo) Bank Indonesia Governor Darmin Nasution, pictured, said on Friday that the central bank was prepared to raise interest rates for the first time since 2009 due to rising inflation. (Bloomberg Photo)

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6:31am Jan 15, 2011

We know that corruption is a major cause of poverty, but does it also part of the cause of inflation?

Both Zimbabwe and Burma have massive inflation that is caused by corruption. Although Indonesia's corruption is nowhere near that of these two countries, it is pretty bad, and cannot have a positive effect can it.

Is corruption actually crippling us?

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Jakarta. Bowing to market pressure, Bank Indonesia on Friday indicated it was ready to raise interest rates for the first time since 2009 to tame rising inflation, the bank’s governor said.

“The direction is to raise rates but it will depend on inflation,” Bank Indonesia Governor Darmin Nasution told reporters on Friday. “BI is ready to find the appropriate time to increase the BI rate.”

Investors and market players have been urging the central bank to adopt a tighter monetary stance, including by raising its benchmark interest rate which had been kept stagnant at a record low of 6.5 percent for the past 18 months.

“Inflationary pressures will continue to pick up and will affect core inflation,” Nasution added. However, he said he was confident the government would take appropriate measures to contain prices of commodities such as rice.

Food prices have risen sharply since December and economists have warned that headline inflation would translate into core inflation if the central bank did not act urgently. Both the International Monetary Fund and the World Bank also said this week that inflation and capital flight were serious threats to the economy.

Inflation hit a 20-month high in December, adding to investors’ concerns that BI’s dovish stance may leave it too far behind the curve in tamping down price pressures.

Darmin’s comments were echoed by Diffy A. Johansyah, BI’s head of public relations, in a telephone interview with the Jakarta Globe.

“Bank Indonesia is ready to raise interest rates if inflation starts to build up,” Diffy said. However, he added the central bank has not decided on when and by how much it would raise the rate.

“We still have to calculate how much we shall raise it according to the policy mix,” he said. “All monetary instruments should be evaluated and weighed so they will be balanced and not negatively affect each other.”

Core inflation, inflation figures excluding volatile items such as food, which is used by the central bank as the benchmark to raise interest rates, stood at 4.28 percent in December. Central Bank officials said that the danger threshold began at 5.0 percent.

Fauzi Ichsan, an economist at Standard Chartered, said earlier this week that food inflation could translate into core inflation as high food prices affect prices of other goods that are included in the core inflation.

“Food inflation could translate into core inflation within three months. BI should raise the interest rate by 100 basis points to 7.5 percent,” he said.

Destry Damayanti, chief economist at Mandiri Sekuritas, concurred but added that core inflation could rise faster, perhaps within a month.

“If the food inflation is persistent, we can see the effect within a month,” Destry said.

She said the central bank should raise the interest rate in the second quarter, and should add 50 basis points to the current interest rate, raising the benchmark rate to 7 percent.

Destry also said that the effort of calming down the inflation should not come only from the central bank, but also from the government, by ensuring adequate food supply.

Over the past few months, prices of chili and rice have spiked sharply, increasing by more than four times.

“Government policy and monetary policy should complement each other, so that this kind of situation can be anticipated,” Destry noted.

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