BI to adopt tight policy to arrest fall of rupiah

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)