More to life than inflation? Indonesia is just asking

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The times are not propitious to question the primacy of the fight against inflation. Yet that is precisely what Indonesia, an emerging markets icon that constantly worries about the strength and sustainability of capital flows, is planning. It doesn’t have to end in tears – if handled well.

With consumer prices spiraling around the world, it’s a brave nation that’s asking its central bank to do more than contain the cost of living. Policymakers have been chastised for not acting sooner and more forcefully to bring inflation under control. Disturbing noises are rumbling in Britain, Australia, New Zealand and Canada about changing mandates to better focus on prices. Would it be a tragedy if a large developing country went in the opposite direction?

This would certainly be ironic, given that Bank Indonesia was remade on the Western model after the Asian financial crisis of the late 1990s. The official work of BI is defined by the pursuit of price and currency stability . Jakarta lawmakers lamented that the framework was too narrow and are again trying to broaden the central bank’s remit to also support jobs and growth. There are also plans to enshrine a form of debt monetization – the direct purchase of government bonds – in the bank’s charter. Jakarta took such a measure during the pandemic, presenting it as a temporary measure to bolster state coffers in times of crisis. It was initially controversial, but Southeast Asia’s largest economy suffered no real currency flight or investor flight. In other words, they got away with it.

When the possibility of adjustments to BI guidelines first surfaced in 2020, they sparked an uproar. They would jeopardize independence, critics tut-tut, ignoring that some banks considered global benchmarks such as the Federal Reserve and the Bank of England, had labor or growth mandates. But let’s not forget that at the time, inflation was low and it was thought that it would probably stay that way. Dual-mandate central banks have been hailed for their Midas touch. It seemed unfair to turn against Indonesia for wanting to take the same path.

Today, with the resurgence of inflation and the persistence of public health crises, the role and form of central banks are up for grabs. Have officials spent too much time chasing historic lows in unemployment just to store trouble for later? Are ambitions to reduce racial and gender disparities in the labor market really something monetary institutions should be concerned about? The idea that attention to climate change should be part of their portfolios and included in lenders’ stress tests remains controversial.

Liz Truss, likely the UK’s next prime minister, has vaguely talked about changing the law so that the Bank of England is more dedicated to fighting inflation. The performance of the Reserve Bank of Australia and its New Zealand counterpart are being scrutinized by outside panels. You can interpret the maneuvers in Indonesia as part of a larger struggle over the extent of central bank power and where it should apply.

President Joko Widodo has approved the direction of the reforms being considered, so some changes are likely. The next question is how to translate these mandates. BI has an inflation target of between 2% and 4%; price gains exceed that and interest rates go up. Further tightening is expected. Most inflation targets have a “2” somewhere. Few — if any — have a number attached to the unemployment rate or gross domestic product. They tend to be vague, which can be a good thing. This gives monetary chiefs some leeway.

Jokowi promised in his first five-year term to boost GDP growth towards 7% from the average rate of around 5%, where he remains stuck as he enters the home stretch of his second term. . Perhaps BI just needs to be seen to recognize that it has a role to play in maintaining that perspective, even if it’s not realized. Or at least not be seen as an obstacle. As a last resort, there is always the piggy bank of bond purchases.

With its natural wealth very unevenly distributed among a population of 270 million scattered over some 17,000 islands, Indonesia may not be exactly a model for the rest of the world. But the arguments will be heard elsewhere as the social and trade costs of returning inflation to comfortable levels bite. Central bank autonomy, a rallying cry for decades, remains the baseline scenario. But expect this orthodoxy to fall under duress. Over to you, Jakarta. More from Bloomberg Opinion:

• Indonesia learns to love risky wartime finance: Daniel Moss

• Jackson Hole should be a central bank Mea Culpa: Marcus Ashworth

• Can Jokowi’s shuttle diplomacy influence Russia? : Clara F. Marques

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

More stories like this are available at bloomberg.com/opinion

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