BI widens its intervention band to five percent

BI widens its intervention band to five percent

JAKARTA (JP): Bank Indonesia widened the rupiah-dollar intervention band yesterday to 118 rupiah (five percent) from Rp 66 (three percent) in a move to curb speculation on the money market.

The central bank's governor, J. Soedradjad Djiwandono, told a press briefing here that the new move, the second since January, is important in keeping the country's foreign reserves at a safe level.

"With this new measure, we hope short-term offshore funds will stay here a bit longer," he said.

He said the expansion of the intervention band also gives financial institutions a better opportunity to carry out foreign exchange trading, so that Bank Indonesia can fully carry out its role as the lender of last resort.

The wider spread will also make short-term trading on the foreign exchange market more costly for speculators, he said.

Since the introduction of the intervention band in 1995, daily transactions on the foreign exchange market have steadily increased to their present level of around US$5 billion per day.

In the last five years, commercial banks had no alternative but to go to the central bank whenever they needed dollars because the interbank foreign exchange market was still too small to absorb the demand.

"The situation is now improving and the interbank money market has been able to absorb most of the demand and supply of foreign exchange," he said. "Foreign exchange trading with Bank Indonesia has, in turn, significantly declined."

With the new move, the central bank will intervene in the market when the dollar trades at 2.5 percent above or below its mid rate.

The spread of the rupiah-dollar exchange rates, or the difference between the sell and buy rates of the rupiah against the dollar, is maintained at Rp 46 or two percent.

Soedradjad dismissed suggestions that the increase in the spread indicated a loss of confidence in Indonesia's economy on the part of foreign investors.

He said the introduction of the new band was not meant to depress foreign exchange trading on the local money market.

"Foreign exchange trading has been stable over the last few weeks. This new measure is only a precaution," he said.

Asked if this wider band was introduced in anticipation of the central bank's plan to further tighten up the monetary system, Soedradjad answered that such speculation was unfounded.

Interbank transactions were very tight late last month, with overnight interest rates almost doubling the previous day's levels at one stage. A rumor that the central bank planned to increase the reserve requirement to three percent from two percent to cool down the economy sparked this panic.

Soedradjad ruled out an immediate adjustment of the reserve requirement, saying that any increase would have a big impact on banks' operations.

"Our commitment is clear...We have to stay away from 'shock measures' in managing the monetary system and as a consequence, we have to use monetary instruments more extensively," he said. "It implies that an increase in the reserve requirement is possible sometime in the future, if existing instruments fail to deal with economic overheating."

The Bank Indonesia governor yesterday also released the central bank's financial reports for the 1995/96 fiscal year, which ended in March.

Soedradjad said that unlike the previous fiscal year, the 1995/96 financial reports also includes information about the country's banking and payment systems. (hen)