Indonesia's new c.bank gov tries bold moves to battle inflation

JAKARTA, July 8 Sun Jul 7, 2013 10:10pm BST

JAKARTA, July 8 (Reuters) - Indonesian vegetable seller Ade is feeling the pinch from the surging inflation rate in Southeast Asia's largest economy. He pays twice as much for his supplies, while his customers at a local market in the capital are buying less.

"My income is diminishing. Most of my customers are complaining about the prices, but what can I do?" said Ade, who like many Indonesians goes by one name.

Indonesia is facing its highest inflation rate in years after fuel prices were increased on June 22 to deal with the budget and current account deficits that were putting pressure on the country's currency, the rupiah.

This week sees the start of the Muslim fasting month of Ramadan, which could add to inflationary pressure as consumer demand usually grows ahead of celebrations at the end of the period. Indonesia has the biggest Muslim population in the world.

Inflation is expected to climb to the highest level in more than four years in July, dampening consumption and hurting businesses' like Ade's.

The central bank expects headline inflation to accelerate to as much as 7.5 percent in July from 5.9 percent last month as the full impact of last month's fuel price hike is felt. That would be the highest inflation rate since March 2009.

The new central bank governor, Agus Martowardojo, is acting boldly to try to contain the inflationary impact on Indonesia, which has had annual economic growth of more than 6 percent for years -- and expects that level again this year.

Within three weeks of taking over as the head of Bank Indonesia (BI), the former finance minister shocked the markets twice in three days.

In a late night announcement on June 11, the central bank lifted its overnight deposit facility rate, known as FASBI, by 25 basis points to 4.25 percent.

Two days later in the first monetary policy meeting with Martowardojo as governor, BI stunned the market again by lifting its benchmark rate by 25 basis points to 6 percent. It was the first Asian central bank to raise its benchmark rate since 2011. Before the June 13 meeting, all analysts polled by Reuters had expected the rate to remain unchanged.

"His policies so far, they are good. He was bold in raising the rates, FASBI and BI rate, in advance," said a Jakarta-based bond strategist who wished not to be named because he was not authorized to speak to the media.

SURPRISE MOVES

Martowardojo, a respected career banker regarded as a fiscal conservative, continued his streak of surprises last week.

The Dutch-born central bank governor issued a rare late night statement on Tuesday, saying the central bank would "strengthen its policy mix as a pre-emptive measure against rising inflation" at the monetary policy committee to be held on July 11.

Analysts viewed those comments as a signal that the central bank will again raise the benchmark interest rate and possibly the overnight deposit facility rate.

There is some concern that BI, which last year emphasized supporting the growth rate, might be doing too much too soon.

While the intentions are good, "to some extent, BI looks a bit in a panic," said Josua Pardede, economist at Bank Internasional Indonesia in Jakarta.

On Friday, Martowardojo went out of his way to prepare the market for news that Indonesia's foreign exchange reserves in June had fallen below $100 billion for the first time since 2011.

First, he organised a last-minute private meeting of at least 10 economists and analysts at his Jakarta office to address any concerns over Indonesia's forex reserves.

"We were invited to discuss macro indicator assumptions for the year of 2014, external account pressure and forex reserves," said Wisnu Wardana, economist at CIMB Niaga in Jakarta, who attended the private meeting.

Then shortly after finishing the impromptu meeting with economists, Martowardojo addressed the media in a rare late night press conference to announce foreign exchange reserves had fallen to $98.1 billion.

Journalists covering the central bank for years said it was unprecedented to hold a press conference less than a week before a monetary policy committee meeting.

And it seems, more late night surprises could be in store from Martowardojo, who typically works 15 hour days and is known to hold meetings at 2 a.m.

"It's our commitment to become more transparent with the market and the public. With this type of direct communication with the market, they can get more such updates," the 57-year-old central bank governor, whose term ends May 2018, told reporters late Friday. (Additional reporting by Kanupryia Kapoor, Adriana Nina Kusuma, and Nadhila Renaldi; Editing by Richard Borsuk and Sanjeev Miglani)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.