These are inauspicious times to be challenging the primacy of fighting inflation. Yet that is precisely what Indonesia, an emerging market icon that constantly frets about the strength and durability of capital flows, is contemplating. It doesn’t have to end in tears — if managed well.
With consumer prices escalating around the world, it’s a brave nation that asks its central bank to do much more than contain the cost of living. Policy makers have been chastised for not acting sooner, and more forcefully, to rein in inflation. Ominous noises are rumbling in Britain, Australia, New Zealand and Canada about altering mandates to sharpen the focus on prices. Would it be a tragedy if a big developing country struck out in the opposite direction?
It would certainly be ironic, given that Bank Indonesia was remade along western lines after the Asian financial crisis of the late 1990s. BI’s official job is defined by the quest for price and currency stability. Lawmakers in Jakarta have chafed that the framework is too narrow and are making another run at broadening the central bank’s remit to support jobs and growth as well. Also under consideration is enshrining a form of debt monetization — the direct purchase of bonds from the government — in the bank’s charter. Jakarta took such a step during the pandemic, billing it as a temporary measure aimed at buttressing state coffers in a time of crisis. It was initially contentious, but Southeast Asia’s largest economy suffered no real run on its currency or investor flight. In other words, they got away with it.
When the possibility of adjustments to BI’s directives first surfaced in 2020, they met with some outcry. They would compromise independence, tut-tutted critics, overlooking that some banks considered the global benchmarks such as the Federal Reserve and the Bank of England, had labour or growth mandates. Though let’s not forget that then, inflation was low and thought likely to stay that way. Central banks with dual mandates were praised for their Midas touch. It seemed unfair to turn on Indonesia for wanting to go down the same route.
Now, with inflation resurgent and public health crises still lingering, the role and shape of central banks is up for grabs. Did officials spend too much time chasing historic lows in unemployment only to store up problems for later? Are ambitions to reduce racial and gender disparities in the labour market really something that monetary institutions should worry about? The idea that attentiveness to climate change be part of their portfolios and included in stress tests of lenders remains controversial.
Liz Truss, the UK’s likely next prime minister, has talked vaguely about changing the law so that the Bank of England is more devoted to inflation-busting. The performances of the Reserve Bank of Australia and its New Zealand counterpart are under review by outside panels. You can interpret the maneuvering in Indonesia as part of a broader tussle about the scope of central bank power and where it ought to applied.
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President Joko Widodo has endorsed the thrust of the mooted reforms, so some change is likely. The next question is how to translate these mandates. BI has an inflation target of between 2% and 4%; price gains are exceeding that and interest rates are climbing. Further tightening is anticipated. Most inflation targets have a “2” in them somewhere. Few — if any — have a number attached to the jobless rate or gross domestic product. They tend to be vague, which can be good. It gives monetary chiefs some leeway.
Jokowi promised during his first five-year term to boost GDP growth toward 7% from the average rate of about 5%, where it remains stuck as he enters the home stretch of his second term. Maybe BI just needs to be seen to acknowledge that it has some role in keeping that prospect alive, even if it isn't achieved. Or at least, not be seen to stand in the way. As a last resort, there is always the piggy-bank of bond purchases.
With its natural wealth highly unequally shared among a population of 270 million scattered across some 17,000 islands, Indonesia may not exactly be a template for the rest of the world. But the arguments will be heard elsewhere as the social and business costs of returning inflation to comfortable levels bite. Autonomy for central banks, a rallying cry for decades, is still the base case. But look for that orthodoxy to come under duress. Over to you, Jakarta. - Bloomberg Opinion
