Appreciation of rupiah probably temporary: UBS

Appreciation of rupiah probably temporary: UBS

SINGAPORE (Reuter): The Indonesian rupiah's appreciation against the dollar following the central bank's decision to widen its intervention band is likely to be short-lived, UBS Singapore said in a commentary yesterday.

Bank Indonesia announced on Thursday that it was expanding the dollar-rupiah band to 118 rupiah or five percent to increase the effectiveness of monetary control in the face of continued short- term capital inflows.

The central bank, which intervenes in forex markets if the exchange rate goes outside the band, previously permitted the dollar to trade in a 66 rupiah band of 2,336/2,402.

The country's high interest rates have attracted heavy capital inflows, pushing the rupiah to the higher end of its trading range against the dollar in recent weeks.

UBS said year-on-year broad money growth reached some 28 percent in March, well above the year-end target of 17 percent.

While the central bank move will cause the rupiah to appreciate and hurt export competitiveness in the short term, UBS said the bank's policy of gradual mid-rate depreciation was likely to remain unchanged.

It said the widening of the band had raised the dollar-rupiah mid-rate by only five rupiah to 2,374.

"We expect the mid-rate to rise by approximately 5.5 percent over 1996, to about dollar/rupiah 2,345," UBS said.

The move to widen the rupiah's trading range corresponds to long-term policy goals of transferring risk to the market while allowing the authorities more leeway in formulating domestic policy, it said.

Given Indonesia's persistent current account imbalances, UBS said, the country needed to reconcile the two goals of supporting non-oil exports and tackling money supply and credit growth.

The rupiah, which touched a high of 2,320.0 to the dollar after the announcement, had somewhat consolidated its gains by yesterday. It was quoted at around 2,323.50/24.50 in late afternoon trade from an opening 2,326.0/29.0.