BI Needs to Raise Reference Rate

Jakarta, Indonesia (News Today) - Bank Indonesia must raise its reference rate to boost foreign investors’ belief Indonesia is making efforts to control inflation, an economist said. The central bank must raise its reference rate by up to 50 basis points as of next month, according to Bank Mandiri’s chief economist, Mirza Adityaswara, here on Monday.

"A 50 basis point rise is actually still relatively low," he said. "We must maintain investors’ confidence, moreover, there are many foreign SBI (Bank Indonesia Certificates) investors. By raising the BI Rate it means Indonesia maintains its inflation."

Mirza said now was the right time to increase the BI Rate which has for the past 12 months been held at 6.5 percent, as inflation is already rising quite high.

"It should have been taken now because the rate of inflation is already high," he said. According to him, factors that had contributed to the high inflation in July was not only cost push but also demand factors. "There must be monetary reaction. There must also be monetary reaction in view of imports which keep increasing," he said.

Mirza said BI seemed to be hesitant to raise the rate while it must be taken at the right time. "Do not be late. If the time is indeed right to raise the rate , do not do it late," he said.

He said BI could raise the rate twice each by 25 basis points. "The BI Rate in 2007 and in the first semester of 2008 was set at 7.5 percent but credits continued to grow. So do not worry," he said. Mirza said economists feared investors would start withdrawing their money if BI was late in increasing the rate.

"There have indeed been debates. Economists are worried BI will be late and raises the rate after correction happens in the bond market. That wlll be late," he said. Mirza said neighbouring countries such as Australia, Thailand, India and China had already raised their rates.

Sharing Mirza’s view, chief economist of Mandiri Sekuritas, Destry Damayanti, predicted the rate would be up 50 basis points in the fourth quarter of 2010 to reach 7.0 percent by the end of the year.

"Inflationary pressure is predicted to continue to increase in the second semester until the end of 2010 reaching predictably to 6.3 to 6.5 percent. The implication is the interest rate will rise in the fourth quarter of 2010 by 50 basis points to reach 7.0 percent at the end of the year," she said.

Source : kompas

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