Bank Indonesia wants to become 'hawkish'

Bank Indonesia wants to become 'hawkish'

INDONESIA - Bank Indonesia (BI) will focus on maintaining economic stability, not economic growth, this year.

"For BI, the theme of 2011 was to propel economic growth, but for 2012 the focus is on stability and the sustainability of our economic expansion," BI Deputy Governor Perry Warjiyo said on Thursday at the release of BI's 2012 annual economic report, "Maintaining Stability to Support Sustainable Economic Growth".

His statement signals that the central bank is preparing to adopt a hawkish stance and tighten up the economy, having been seen as being monetarily loose for a long time.

The central bank will focus on Indonesia's deteriorating external imbalances, and managing recent inflation blips, he said. Monetary tightening will prioritize macro-prudential measures, not interest rate adjustments.

After imposing down payment limits of 20 to 30 per cent on housing and automotive loans last year, BI is mulling stricter loan-to-value (LTV) requirements for industries such as automotive and construction, whose products suck in high levels of imports.

"We are examining the possibility of macro-prudential regulations for producers, having previously applied them only to their customers," said Perry.

He explained that LTV regulations for industry "are not intended to impede credit growth, but improve the risk management of the industries".

The newly appointed deputy governor argued that macro-prudential measures were necessary since the central bank forecast only modest improvement in Indonesia's external imbalances, which became the major worry for investors and policymakers throughout 2012.

By the end of 2013, Indonesia's current account deficit is expected to decline slightly to 2.5 per cent of gross domestic product (GDP), from 2.7 per cent last year, mainly caused by stalling economic recovery reducing exports, coupled with high imports of oil for subsidized fuel.

The central bank also forecast the consumption of subsidized fuel to top 50 gigaliters this year, higher than the allocated quota - a situation that, if no immediate resolution is agreed, would prompt "negative sentiment to fiscal sustainability that in turn will apply further pressure to the rupiah", according to BI's annual economic report.

BI also vowed to maintain its independence ahead of the 2014 elections, especially as recent developments show that many central banks - notably the Bank of Japan, the Federal Reserve and the European Central Bank - have started issued quantitative easing and other monetary policies whose implementation was attributed to a strong push from politicians.

With Indonesia recently subject to rising inflation and a widening current account deficit, calls have mounted for BI to switch to a hawkish monetary footing - a term for an inflation-focused central bank that prioritizes monetary tightening to maintain economic stability, which usually comes at the expense of economic growth.

BI was widely perceived as pro-growth and monetarily loose under Governor Darmin Nasution. The central bank has kept its benchmark rate at an historic low of 5.75 per cent since February last year.

The central bank will keep the benchmark rate unchanged at least until the end of this year, not making any adjustment "unless there is a severe shock in price level", such as a sudden increase of price of subsidized fuel, said Perry.

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