BI curbs inflow of short-term funds

JAKARTA (JP): Bank Indonesia Governor Soedradjad Djiwandono said yesterday that the widening of the central bank's dollar buying-and-selling band from Rp 30 to Rp 44 last week was aimed at curbing the flow of short-term funds to the bank.

"The measure is also designed to further develop foreign exchange trading between the banks themselves," Soedradjad told journalists after attending a meeting of economic ministers.

He said banks still preferred to deal with Bank Indonesia in relation to their obligation to maintain a net foreign position of at least 25 percent of their capital and that, consequently, the central bank bore the brunt of the exchange rate risks.

"We hope the measure will develop inter-bank foreign exchange transactions. They (the banks) have freedom in trading," Soedradjad said.

He said Bank Indonesia wanted banks to deal more with each other in foreign exchange transactions.

"But the latest measure to widen the dollar's exchange rate puts most of the exchange rate risks on the banks themselves," he said, adding that previously Bank Indonesia.

Soedradjad denied suggestions that last week's measure was a surprise move, saying it was in fact the fourth time since 1992 that the central bank had widened the dollar's exchange rate band.

Last year, Bank Indonesia widened the exchange rate band of the rupiah twice. The first rise, in January, saw the band increase from Rp 10 to Rp 20. On the second occasion, the band was raised from Rp 20 to Rp 30.

The wider band provides more room to the central bank to manage monetary policy and allows for more price adjustments in the foreign exchange market to absorb often volatile short-term capital flows.

The latest measure will transfer more exchange rate risks from the central bank to foreign exchange traders or speculators and is therefore expected to deter short-term speculation. (vin)