"Comfortable" with Strong Rupiah

The strength of Indonesia's currency helps mitigate the effects of inflation, which remains one of the country's major challenges, Bank Indonesia Deputy Governor Hartadi Sarwono said here Monday.
The central bank will remain “comfortable“ with the exchange rate as long as it is strengthening along with other currencies in the region, he told Dow Jones Newswires. Since currency strength remains a regional trend, Indonesia isn't “losing...competitiveness,“ despite the rupiah's recent gains, he said.
The Indonesian rupiah has been generally strengthening, like many other emerging-market currencies. The central bank expects the inflation rate to be 6.5% by the end of this year, due to higher food prices and an expected increase in fuel prices, Sarwono said during comments on Indonesia's economy.
But the rupiah's appreciation helps the central bank manage inflationary pressures, he said. Meanwhile, the currency has room for further appreciation, much of which has stemmed from Indonesia's balance of payments surplus, he added.
Along with the exchange rate, the bank has to use a “blend“ of both monetary policy and macroprudential measures, such as raising banks' reserve requirements, to fight inflation, the deputy governor said.


“I cannot rely only on one policy,“ he said.
If food prices gradually come down, and Indonesia is able to maintain stable core inflation, price pressures could become more benign, Sarwono said. Nonetheless, the central bank will continue to monitor domestic fuel prices closely, which, along with other commodity prices, remain a key driver for higher prices in the country, Sarwono said.
Meanwhile, strong capital inflows, including short-term portfolio flows, remain the other major challenge for the country. While those flows are necessary to finance economic activity in the region, they have to be managed carefully and used to increase Indonesia's productivity, he said.
The bank's policy of accumulating reserves serves as protection from the potential risk of a sudden reversal of flows out of the country, which could destabilize the economy, he added.
Still, without an “improved“ quality of direct investment, it will be difficult for Indonesia's economy to continue growing without creating inflation, Sarwono said.
The country's economic growth is expected to continue, driven in part by increased government expenditures, he added. Ultimately, however, the central bank is trying to use monetary policy “prudently,“ as it fights on two fronts--strong capital inflows and inflation, according to Sarwono.