Aditya Suharmoko, Jakarta – Inflation is now the main threat to Asian economies, including the Indonesian economy, requiring further tightening of monetary policy, the International Monetary Fund (IMF) said Wednesday.
"(It is) important to contain inflationary pressures, including by monetary tightening where needed," deputy director for the IMF's research department, Charles Collyns, told a press briefing here. "Many countries have tightened their monetary policy by raising interest rates to keep inflation under control."
During its last policy meeting, Indonesia's central bank maintained the benchmark interest rate at 8 percent to keep inflation in check, with year-on-year inflation reaching 8.17 percent in March.
Indonesia still has room to raise benchmark interest rate by 50 basis points, according to Bank Mandiri chief economist Martin Panggabean, to strike the balance between curbing inflation and accommodating industry needs to expand their businesses.
Raising the interest rate too high, however, could discourage businesses and consumers alike to seek bank loans as the cost of borrowing becomes more expensive.
Key commodity prices were likely to remain high throughout this year, said the IMF, as many stock market brokers had shifted their portfolios to commodities to cover their losses following the turmoil in global stock markets.
The Jakarta Composite Index has fallen 18.38 percent from 2,739.70 at the end of 2007 to 2,314.30 on Wednesday.
"The prices will be maintained at high levels, but they won't continue to rise. Policies may need to adopt quickly if the global downturn intensifies," Collyns said, adding that the Asian financial markets have not been immune to the global turbulence.
High inflation eats up people's purchasing power and could derail consumer spending, a crucial indicator for a country like Indonesia whose economy relies on strong consumption. Consumption makes up over 60 percent of Indonesia's economy, according to the Central Statistics Agency (BPS).
Separately, the government said almost all countries worldwide were facing rising inflation, spurred mostly by ever-increasing oil and commodity prices.
"However, domestically, everyday we hold a meeting to discuss the (consumer) prices, including rice, kerosene, cooking oil, soybeans... They are our main focus," said Finance Minister Sri Mulyani Indrawati.
Thus, changes in policy remains open, she said. The IMF forecasted inflation in Indonesia to reach 7 percent this year, higher than the government's estimate of 6.8 percent. It also predicted the country's economy to grow by 6.1 percent, lower than the government's expectation of 6.4 percent.