POLICY MIX NEEDED TO CONTROL INFLATION

By Andi Abdussalam

Jakarta, Sept 20 (Antara) - President-elect Joko Widodo, who will be installed on October 20, has said his government will increase the prices of subsidized fuel to bring down the quantum of subsidy burdening the state budget.          Observers predict that fuel price hike will trigger inflation, otherwise supposed to stay this year in the range of 4.5 plus minus one percent.          Bank Indonesia (BI), the Indonesian central bank, however said that it was not worried by the effect of any possible rise in inflation.          "No need for too much concern (over this). It would be only a short term effect. In two or three months, conditions would be back to normal again," BI Governor Agus Martowardojo said.          Agus said the government needs to raise the prices of subsidized fuels to keep the vital fiscal stats in a healthy condition. "Price adjustment is needed, considering the fiscal condition," he added.          Bank Indonesia hoped that the prices of subsidized fuels would be raised before the US central bank, the Fed, begins to raise its interest rate, he said. The Fed Fund rate is expected to be raised in mid 2015.      Bank Indonesia will implement a stringent monetary policy by the end of 2014 to achieve the inflation target, improve the current account deficit, and will try to anticipate the impact of the global economic policies.            "In general, until the end of this year, we can manage the situation,"  Agus Martowardojo stated on Friday.          On Thursday (Sept. 11), the Board of Governors of Bank Indonesia decided to maintain BI's benchmark interest rate (BI Rate) at 7.5 percent. BI also decided on fixing the interest rate at 7.5 percent and 5.75 percent for lending and deposit facilities, respectively.          Economic observer Denni Puspa Purbasari of the University of Gadjah Mada said the BI fixing the interest rate alone cannot effectively control the inflation once fuel prices  are increased to reduce the component of subsidy.          In order to control the inflation, other monetary instruments and coordination with the central government is needed.          "We have to see other factors, not only the core inflation which can be controlled by BI. The government also has a role to play in the inflation control structure such as administering prices and checking food volatility," Denni told Antara on Friday.          The economic observer focussed on the possibility inflation increasing if the plan to raise fuel oil prices is implemented by this year end. Bank Indonesia and the government need to give attention to the first and second round of the effect of such price increase.          A monetary policy mix, including the interest rate policy, must be accompanied by other government policies to ensure food supply stable and administer prices effectively. The prices to be administered in this case are prices of fuel oils and natural petroleum gas.          "Fuel oils and gas clearly need swift government policy responses. The point is that the government should maintain adequate supplies," Denni said.          She suggested that the government should prepare and guarantee the availability of supplies much before it decides to increase the price of fuel oils. The government should also come up with a policy to anticipate the situation emerging out of the subsidized fuel quota coming to an end before the end 2014 as predicted by state-owned oil and gas companies.          Pertimina has predicted that subsidized fuel quota for this year will run out by the end of November or early December.  In order to maintain the quota, Pertamina imposed a sale restriction policy with effect from last August.          Denni suggested that the government should not implement a restrictive policy with regard to energy and food supplies. The government can even allow the import of food and energy to maintain stocks at home.          "We are now in the dry season. The government should not turn a blind eye to this fact. We should bear in mind the experience when we imposed restriction on imports last time. Supplies at home ran short, everything became expensive and the inflation soared," she reminded.          According to Denni, in order to keep the inflation rate at 4.5, plus or minus one percent, in 2014, the BI no longer has ample room for manoeuvre because it needs to be accompanied by government policies.          She said the government's policies in this regard are crucial as these will impact the expectation of market players who could influence capital flow.          According to BI Governor Agus Matowarojo, BI will coordinate better with the government in implementing policies to control inflation so that the economic adjustment process remains smooth.          He said that there are several external and domestic risks that can interfere in achieving the inflation target and improving the current account deficit.          "So, the main thing is that we have to strongly prepare the Indonesian economy and prioritize the management of funds that may outflow to the United States when the Fed funds rate increases," he emphasized.          Therefore, BI will continue to strengthen the monetary, macro-prudential, and domestic economy. "BI will prepare a policy that lays emphasis on macro-prudential aspects. We hope that macro-prudential aspects will strengthen our macro economy when the Fed funds rate inclines," he noted.          In the meantime, BI economist Solikin M Juhro, who is also director of the Monetary and Economic Policy Department, said earlier that BI will use a mix of instruments to anticipate the impact of fuel price hike. This monetary instrument needs to be responded to by a coordinated policy from the government side.          "The step must also be pre-emptive, not always with an interest rate policy. It will depend on when it is raised and to what extent is its impact," said Solikin.          Inflation rate in August 2014 was recorded at 0.47 percent, 3.99 percent year on year. BI ensured that the August inflation was in line with the 4.5 plus minus one percent target for 2014.          However, BI also predicted that the inflation at the end of this year will touch the upper limit of the 4.5 plus minus one percent target, if subsidized fuel oil prices are hiked. This projection has taken into account the impact of the gas price increase. ***2*** (A014/INE/B003) EDITED BY INE (T.A014/A/BESSR/Bustanuddin) 20-09-2014 21:33: