BI to tighten monetary policy to help rupiah

JAKARTA (JP): Bank Indonesia said Tuesday that it would further tighten its monetary policy in a bid to help the ailing rupiah and curb inflation ahead of the year-end festivities.

"Bank Indonesia will adopt a tighter monetary policy to contain inflationary pressures and the weakening of the rupiah," the central bank said in a statement issued following a monthly board of governors meeting.

"Bank Indonesia will also try to supply foreign currency to balance market supply and demand in line with the monetary program which has been set," it added.

The central bank said that inflation continued to rise which was directly or indirectly affected by government policies on increases in prices and salaries.

It said that inflation in November rose by 1.32 percent from the level in the previous month, sending the cumulative inflation rate for the first 11 months of this year to 7.2 percent or an annualized rate of 9.1 percent.

Bank Indonesia said that the higher demand in the run up to the current Ramadhan fasting month and the higher price expectations of the public had contributed to the increase in the November inflation level.

The government initially set an inflation target for 2000 of 5-7 percent, but it later revised it upward to more than 8 percent due to the weakening of the rupiah and the inflationary pressure caused by the recent fuel price increase and the upcoming year-end festivities, which include the Idul Fitri, Christmas and New Year celebrations.

The rupiah has been weakening over the past few months due to a combination of domestic political problems and external factors.

The rupiah is currently hovering at around Rp 9,523 per U.S. dollar which is more than 25 percent drop from the level in January.

Bank Indonesia confirmed in its statement that the weakening of the rupiah was related to negative sentiment arising from social-political uncertainties.

But it added that a rise in the corporate demand for dollars to repay overseas debt had also contributed to the decline in the local currency.

Elsewhere, Bank Indonesia's statement said that there had been some improvement in the condition of the banking sector following the completion of the government's bank recapitalization program, which had cost around Rp 412 trillion as of the end of September.

It said net interest margins had improved, but added that the recovery process of the banking sector's intermediary function has not yet been fully restored.

The statement also said that economic growth next year was expected to be within the range seen in 2000, supported by a revival of the banking and finance sectors.

This is the first statement made by the board of governors after most of its members tendered their resignation last month amid calls from President Abdurrahman Wahid to reshuffle the top management of Bank Indonesia in a bid to create a credible central bank.

The members of the board of governors who have resigned will remain in office until their successors have been appointed. The leadership vacuum has created doubts about whether the central bank could come up with strong policy measures following the resignations.

The House of Representatives is completing an amendment of the central bank law which would remove the legal obstacles to a planned major reshuffle of Bank Indonesia's management. It is not yet clear when the amendment will be passed. (rei)