This week’s economic data from Indonesia were just what policymakers ordered: a modest let-up in the country’s strong post-crisis rate of growth, and a little disinflation. What is remarkable is that Jakarta is achieving this Goldilocksian rebound without adjusting the price of money. Between August 2007 and August 2009, the central bank moved rates 17 times (six up, 11 down, for a net 175 basis points of loosening). Since then, it has moved just once, tightening by 25 bps in February this year. Instead, it is using all manner of unconventional tools to keep prices in check: currency appreciation, tariffs on capital, and ordering banks to keep more cash in reserve.
This policy improvisation, seen not just in Asia’s sixth-largest economy, is mostly a consequence of fighting the Fed. Emerging markets want to tighten without tempting speculative inflows through higher rates: Russia, Poland, Turkey and Malaysia have all made unusually heavy use of the reserve requirement ratio, for example. It is also, perhaps, an homage to China, which has long had a preference for quantitative tools over qualitative measures: compare 100 bps of rate-increases with ten reserve ratio hikes totalling 450 bps since January last year. Bank Indonesia, indeed, increasingly seems to be channelling the People’s Bank of China: recent statements have made much of the “stability” caused by a “macroprudential policy mix,” while describing “added support from strengthened policy co-ordination with the government.”
These unorthodox measures may not pay off. Core inflation is still (slowly) creeping up in Indonesia, while headline inflation has been above the BI’s 4 to 6 per cent target for the past six months. The mild first-quarter slowdown was caused mainly by a pause in government spending, which accelerates as the year goes on. And as watchdogs keep warning, low or even negative real interest rates carry Chinese-style risks: resource misallocation, and asset price bubbles. Yet for the time being at least, imitating Beijing seems the best way of countering Washington.
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