BI to tighten monetary policy to help rupiah

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)