BI won't hike reserves requirement in near future

The Jakarta Post, Jakarta

The central bank said on Friday it would not increase anytime soon the current 5 percent minimum reserves requirements for the country's commercial banks.

Bank Indonesia deputy governor Maulana Ibrahim said any increase would require further study and "would not be implemented in the near future".

"It is still a plan, we still need to examine it carefully," he said.

"A hike (in the reserves requirement) would increase the cost (of funds) for banks, and would lessen the amount of money available for people to make transaction because more funds will be kept within the central bank," he said.

Maulana also promised that the central bank would first discuss such a plan with the banking industry.

Earlier reports said the central bank was considering increasing the minimum reserves requirement in a bid to control the currency in circulation, particularly during the elections period when political parties are spending large amounts of money on their campaign activities.

Controlling the money in circulation is necessary to reduce inflationary pressure.

For the past year, inflation has been generally low, thanks mainly to the stronger rupiah and lower food prices. The relatively benign inflation environment has allowed the central bank to aggressively cut down its benchmark interest rate, now hovering at a new record low of 7.86 percent. The lower interest rate, in turn, has triggered banks to cut their lending rates, making lending more affordable to the corporate sector.

However, banks have generally remained reluctant to boost lending to the corporate sector for a number of reasons, including lingering risks in the corporate sector amid a lack of progress in the restructuring of corporate debts.

A number of analysts have criticized to the planned increase in the reserves requirement, saying it would only discourage banks from boosting their lending.

Asked how long would it take Bank Indonesia to review the proposal, Maulana said the study would be conducted by the central bank's research division, and "until now there has been no presentation from them (the research unit) on the matter".

The current minimum reserves requirement requires banks to set aside 5 percent of their outstanding third-party funds as reserves in Bank Indonesia. The reserves requirement can serve as a monetary policy tool for the central bank: it can be raised when the central bank want to adopt a tighter monetary policy, or it can be lowered.