CENTRAL BANK EXPECTED TO RAISE BENCHMARK RATE

 By Andi Abdussalam
     Jakarta, Aug. 2 (ANTARA) - The central bank, Bank Indonesia (BI), is expected to raise further its benchmark interest rate by 25 basis points to 9.0 percent this month following monthly and year-on-year inflationary pressures in July which reached 1.37 percent and 11.9 percent respectively.
     "The July inflationary pressures will likely force the central bank to raise its benchmark interest rate (BI rate) by 25 basis points to 9.0 percent," state-owned BNI economist Ryan Kiryanto said on Friday.
     The BI will likely take the step to offset the upward trend of inflation which is expected to be fueled by seasonal factors in the coming months.
    "But it is believed that the BI rate increase will not shock the market because banks and the real sector could understand the background conditions of such a policy," Kiryanto said.
     He said if however the BI worried about negative reactions from businesses if it raised its BI rate, the central bank would at least maintain its last-month rate level at 8.75 percent.
     BI decided early last month to raise its benchmark interest rate by 25 basis points to 8.75 percent in a widely-expected move to curb the accelerating inflation.
     Inflationary pressure in 2008 was particularly the result of fuel oil and food price hikes. It noted that the inflationary pressure also resulted from rising demands due to a rise in the amount of bank loans and money supplies until the second quarter of this year.
     The inflation rate in July 2008, fueled by price increases in groups of goods and food as well as groups of services such as education, recreation and sports was recorded at 1.37 percent.
    "This is actually an annual cycle which has previously predicted to occur," Head of the Central Board of Statistics (BPS) Rusman Heriawan said on Friday. Thus, he said, the calendar year inflation is recorded at 8.85 percent and year-on-year inflation rate at 11.9 percent.
     The government is determined to maintain year-on-year inflation rate at 11.24 percent.
     Trade Minister Mari Elka Pangestu said recently the government was carrying out an inter-departmental coordination in an effort to achieve the inflation target of 11.25 percent by year end.
     "The government's inflation target is 11.25 percent. We have to make sure that the target is achievable," the minister said after installing a number of echelon-1 officials at the Trade Ministry.
     She said it was her ministry's obligation to prevent the occurrence of scarcities in good stocks and to guarantee the availability of supplies so that prices would not fluctuate.
     Pangestu said that efforts to offset the inflation rate should be made comprehensively, not merely by adopting macro economic policies such as increasing or lowering the Bank Indonesia benchmark rate.
     In the meantime, BI, besides using its benchmark rate,  will also study the possibility of raising banks' minimum reserves requirement (GWM) in order to curb increasing inflation.
     "We will take a look at adjustments in the context of all monetary instruments we have such as the BI rate, foreign exchange reserves and weekly auction. If need be, we will consider the GWM. We have many weapons so that we will adopt a good policy combination that will have a minimum negative impact and bring down the inflation rate," BI Governor Budiono said.
     The second amendment of Bank Indonesia's regulation on the Minimum Reserves Ratio Requirement (GWM) for Public Banks stipulated that public bank's GWM is set at 5 percent plus 3 percent for those with a total public funds (DPK) of between Rp10 trillion and Rp50 trillion, and plus 1 percent for banks with a DPK between Rp1 trillion and Rp10 trillion.
     Banks with a DPK of lower than Rp1 trillion are only required to meet the 5 percent GMW requirement.
     Data at BI show that until December 2007 the amount of GWM was Rp158.45 trillion and up to March 2008 it was recorded at Rp125.71 trillion.
     By preparing monetary instruments, BI is optimistic that the inflation could be controlled.
     "We hope it will not (be worrying). The current inflation rate is chiefly fueled by global crude prices and must be viewed carefully. Moreover, the finance minister's statement that the fiscal side is still safe has raised the public's and the market's confidence in the economy," BI Deputy Governor Hartadi A Sarwono said.
     He said the finance minister had stated that the state budget was still safe even though global crude prices hit another record high of US$150 a barrel. The statement made BI confident it could control the accelerating inflation rate fueled by last May's fuel oil price hikes.
     After all, the world crude price spiral has passed its peak of US$146 a barrel, and is now estimated that it will drop to between US$120 and US$130 in the second semester of 2008.
     "The crude price will settle at a range of US$120 to US$130 a barrel," National Development Planning Board (Bappenas) Planning Director Bambang Prijambodo said.

(T.A014/A/f001) 02-08-2008 13:31:20