BI rules out rate hike to shore up ailing rupiah

BI rules out rate hike to shore up ailing rupiah

JAKARTA (JP): Bank Indonesia ruled out on Tuesday any plans to
raise interest rates or engage in massive dollar-selling in an
attempt to rescue the ailing rupiah.

Bank Indonesia deputy governor Miranda S. Goeltom said such
monetary measures would be meaningless because the main elements
behind the plunge in the value of the rupiah against the U.S.
dollar were "nonmonetary factors."

"We think that nonmonetary factors are the largest contributor
to the current weakening of the rupiah," she told a news
conference. "Raising interest rates or sterilization measures
would be more significant if those (nonmonetary) factors were
eliminated," she added.

After rising to an intraday low of Rp 8,725 against the U.S.
dollar, the Indonesian currency closed the day at Rp 8,540 on
Monday, compared to Rp 8,380 late on Friday.

Dealers said that domestic political and economic uncertainty
as well as plans by the U.S. Federal Reserve to raise interest
rates by 50 basis points on Tuesday continued to put pressure on
the rupiah.

Traders added that a statement by President Abdurrahman Wahid
that he had no quick fix to save the rupiah also disappointed the
currency market.

Abdurrahman, also known as Gus Dur, said on Friday that he
would take action if the local unit continued to weaken on
Monday.

The statement raised speculation that the government was
considering some form of currency control.

But Abdurrahman denied this, saying his remark was
misinterpreted. He said he was merely pointing out that if the
rupiah continued to weaken, he would discuss it with his
economics ministers.

Abdurrahman held a meeting late on Monday with several senior
economics ministers and other advisers, including chairman of the
National Business Development Council (DPUN) Sofyan Wanandi and
National Economic Council member Faisal Basri.

But finance minister Bambang Sudibyo was present at the
meeting.

The President is scheduled to hold a news conference on
Tuesday morning concerning the results of the meeting.

Meanwhile, Sofyan said earlier on Monday that the central bank
should raise domestic interest rates to about 15 percent to help
strengthen and stabilize the rupiah.

"The current interest rate level is simply too low," Sofyan
told reporters.

He added that people now preferred U.S. dollar deposits, which
offered higher yields.

But Miranda insisted that such monetary policy would be
pointless because of the current panicked market condition due to
domestic uncertainty.

"We will not respond by launching drastic monetary measures.
But we will be on alert, level one alert.

If we react in panic at a time when the market is in a
panicked condition, there will be greater panic," she said.

Miranda expected that the Wednesday auction of Bank Indonesia
promissory notes (SBIs) would result in a flat interest rate for
the one-month SBI.

The interest rate of the one-month SBI is currently at 10.91
percent.

Miranda said that even if the U.S. Federal Reserve did raise
its interest rates by 50 basis points, the central bank would not
follow suit.

She stressed that the important thing was to eliminate the
domestic political and economic uncertainty.

"This is something that actually can be done ... We must stop
making unnecessary statements, and reduce the inconsistency in
implementing policies. These are the sort of things the market is
waiting for," she said, adding that the current weakening of the
rupiah was temporary.

Meanwhile, Bank Indonesia announced that starting this month,
the central bank would no longer use the Gross Foreign Assets
(GFA) concept in measuring the country's foreign exchange
reserves, but would use the International Reserve and Foreign
Currency Liquidity (IRFCL) concept which is based on the so-
called Special Data Disseminations Standards of the International
Monetary Fund (IMF).

Under the new IRFCL concept, only foreign assets with maturity
of less than one year are excluded, while under the GFA concept,
assets like export drafts with maturity of more than one year are
included.

The IRFCL concept is based on the current market exchange
rate, while the GFA concept uses the March 31, 1998 rate as the
exchange rate basis.

Based on the GFA concept, the country's gross forex reserves
were about US$29 billion, while using the new IRFCL concept, the
reserves amount to a lower figure of more than $27 billion.

Miranda said that this was because relatively nonliquid assets
were excluded from the calculation. (rei/prb/bkm)