BI vows to defend rupiah if necessary

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on Friday that the central bank would take necessary measures to defend the rupiah if the local unit weakened due to a delay in the announcement of the new Cabinet.

Sjahril said that he had instructed the central bank's money market division to closely monitor movements of the local currency.

"I can't disclose what measures will be taken by BI, but I have instructed staff in the (money) market division to intervene if necessary," Sjahril said.

The rupiah closed higher at Rp 9,500 per U.S. dollar late on Friday, from Rp 9,640 on Thursday, following the remarks. Dealers said that state banks had sold dollars on behalf of Bank Indonesia.

Sjahril said that postponing notification of the Cabinet lineup had weakened sentiment in the rupiah.

There has been concern in the currency market that the delay has been caused by heavy political lobbying among major political parties vying for posts in the Cabinet of President Megawati Soekarnoputri. This may undermine the capabilities of the new Cabinet.

Sjahril, however, expected that negative sentiment in the rupiah would only be temporary.

Sjahril said that the market should realize that the President may have delayed the decision because she needed more time to form a credible and strong Cabinet team.

He said that if the market recognized this positive aspect then the rupiah would strengthen again.

The rupiah soared to a six-month high following the appointment of Megawati last week.

Megawati was expected to announce her Cabinet on Friday, but delayed the event until next week.

The recent strengthening of the local unit allowed the central bank to decrease the interest rate of Bank Indonesia one-month SBI promissory notes to 17.15 percent on Wednesday, slightly lower than 17.17 percent in the previous week.

Sjahril was quick to assert that this move should not be interpreted as a precedent for a continued decline of the benchmark interest rate in the near future.

He said that the interest rate would only decline if there was stronger confidence in the market. He did not elaborate any further.

Bank Indonesia has adopted a tight monetary policy by raising the benchmark interest rate in a bid to help curb inflationary pressure and stabilize the local currency.

The Central Bureau of Statistics (BPS) reported earlier this week that inflation remained high in July, lifting the year-on- year inflation rate to 13.04 percent.(hbk/bkm)