BI rate rise gives rupiah new boundce

The Jakarta Post, Jakarta

It would appear that the cavalry have finally arrived to save the rupiah from its seemingly hopeless battle against the U.S. dollar and high oil prices, with the central bank raiding to the rescue with a battery of new monetary policies -- including a much- anticipated interest rate hike.

The government, meanwhile, hinted that it too might be stirring into action, with President Susilo Bambang Yudhoyono promising to hammer out a comprehensive strategy to defend the rupiah by Wednesday night at the latest.

The rupiah on Tuesday rebounded to Rp 10,525 a dollar, an improvement of almost 3 percent on its four-year low the previous trading day. It was the currency's first gain in its ten-day slide against the greenback.

The strengthening of the rupiah led to renewed confidence on the stock market, whose composite index closed up 4.5 percent at 1,039.82 points, almost recovering its 5 percent loss since the week's opening.

The rupiah's rebound was mainly due to Bank Indonesia (BI) raising its benchmark BI Rate by 75 basis points (bps, or 0.75 percent) to 9.5 percent as of Tuesday. It also hiked its one-week overnight rate that is offered to commercial banks by 100 bps to 8.5 percent as of Tuesday.

The rate hikes immediately lifted the rupiah, after it had plunged to as low as Rp 11,800 earlier in the day.

"These measures were taken to restore public confidence," BI Governor Burhanuddin Abdullah said. Higher interest rates help the rupiah by absorbing liquidity and making investment in the currency more attractive. On the down side, they will result in dearer borrowing and thus are likely to lead to lower economic growth.

Burhanuddin said that BI would also raise the minimum reserve requirement for banks by up to 5 percent as of Sept. 6.

At present, BI requires banks to stash between 6 percent and 8 percent of their deposits with the central bank.

"This will provide an incentive for banks to extend loans to the business sector," he said. A higher reserve requirement helps to discourage banks from using their excess liquidity for speculative forex trading.

Meanwhile, Susilo urged the public not to panic, saying that the government was serious in its efforts to deal with the rupiah's slide.

"I would call on the people to remain calm. I ask for your support as the government and BI are addressing the issue seriously and will handle it properly," he told a hastily convened press conference, which was aired live on some television stations.

The President said the country's economic conditions now were different from those that prevailed in 1998, when Indonesia suffered a massive economic crisis that was precipitated by a slumping rupiah, and which ultimately almost drove the economy to collapse.

"This is important. Don't get the erroneous impression, brothers and sisters across the country, that today's situation is the same as that in 1998," Susilo said.

Susilo said the government had yet to find the right prescription to fix the problem but "we believe that we will find the solutions ..."

"Hopefully, we will see concrete solutions tomorrow evening," he said.

Among the concrete actions now being awaited are a cut in the country's fuel subsidies through another fuel price hike -- something that will take immense political courage. Rising fuel consumption, declining oil production and more expensive imports as a result of higher oil prices have put both Indonesia's budgetary sustainability and the rupiah at stake, and have shaken public confidence in the country's economic well-being.