BI to adopt tight policy to arrest fall of rupiah

JAKARTA (JP): The central bank will adopt a tight monetary policy in a bid to arrest the fall of the flagging rupiah against the U.S. dollar.

Bank Indonesia deputy governor Miranda Goeltom said here on Thursday that a tighter policy was unavoidable after the United States increased its interest rates.

"We have to do something or the market will punish us," she told reporters on the sidelines of a seminar.

But she added that it is too early to say whether the central bank would immediately increase its benchmark interest rate.

She said, however, that the monetary tightening policy would definitely slow the central bank's intention to cut the interest rate of Bank Indonesia's (SBI) promissory note to the 10 percent level.

"The hike in U.S. interest rates would slow down the decline in the SBI rates. So it will not happen as quickly as expected," she said.

The interest rate of the one-month SBI note is currently at 11.04 percent, compared to the record level of 70 percent in the middle of 1998 when the economic crisis deepened, and around 35 percent in early 1999.

The central bank has been under pressure to ensure that domestic interest rates go as low as possible to minimize the interest costs of government bonds issued to finance the country's bank restructuring and recapitalization program.

The U.S. Federal Reserve on Wednesday raised its main interest rate by a quarter point to 5.75 percent in a bid to cool down the overheating economy. The Fed also indicated that it would increase rates further.

Miranda said that the hike in U.S. rates had contributed to the overall decline in world currencies against the U.S. dollar.

"All currencies in the world including the yen, Australian dollar, Singapore dollar and the rupiah are under pressure," she said.

Miranda said that another factor affecting the rupiah was the political uncertainty created by the dispute between President Abdurrahman Wahid and former armed forces commander Gen. Wiranto, who is now the Coordinating Minister for Security and Political Affairs.

Abdurrahman said earlier this week that Wiranto should resign to allow a fair investigation of his alleged involvement in the human rights violations in the former East Timor. Abdurrahman made the statement following rumors that a certain section of the military was planning a coup. Wiranto has rejected the calls for his resignation.

The rupiah started the week at around Rp 7,400 per U.S. dollar, and has closed at Rp 7,660, down from Rp 7,520.

Miranda said that the uncertainty created by the political infighting between Abdurrahman and Wiranto has discouraged foreign investors from entering the country.

"Investors are still adopting a wait and see attitude," she said. (rei)