Central bank expands its intervention band

Central bank expands its intervention band

JAKARTA (JP): Bank Indonesia, the central bank, announced
yesterday that it will widen its intervention band for the buying
and selling rates of the rupiah against the American dollar to 3
percent or Rp 66 (3 U.S cents) from Rp 44, effective on Jan. 2.

Paul Sutopo Tjokronegoro, the central bank's director for
foreign exchange, said, however, that the central bank will still
maintain the exchange rate band of the rupiah against the
American greenback at the current level of 2 percent, or Rp 44.

He added that the 2 percent buying-and-selling spread of the
rupiah against the U.S dollar had so far served both as the
exchange rate band as well as the intervention band. With the new
policy, however, the two bands will have different boundaries.

As of Jan. 2, banks will be able to conduct foreign exchange
transactions with Bank Indonesia when the inter-bank exchange
rate spread exceeds the intervention band, Paul said.

Whenever the inter-bank exchange rate spread falls within the
intervention band, foreign exchange transactions between banks
and Bank Indonesia are to be handled on a case-by-case basis.

"Based on market developments, Bank Indonesia can conduct
market interventions any time it feels necessary," Paul noted.

Paul explained that the move was designed to enhance inter-
bank foreign exchange transactions and to further reduce the
dependency of local foreign-exchange banks on the central bank.

Data at the central bank show that the daily volume of foreign
exchange trading in Indonesian financial market reached US$4.6
billion this month, compared to $2.7 billion in December, 1992.

Meanwhile, the daily volume of foreign exchange transactions
between banks and Bank Indonesia (central bank) dropped to $24
million from $37 million in the same period.

At yesterday's press conference, Paul was accompanied by two
other central bank directors: Boediono, director of monetary
policies, and Mukhlis Rasjid, director of credits.

Boediono noted that the wider intervention band provides more
room for the central bank to manage monetary policy and allows
for more price adjustments in the foreign exchange market to
absorb often volatile short-term capital flows.

"With this policy we can maintain the stability of our
currency. At the same time, we give more flexibility to the
market to move," Boediono said.

Since last year, Bank Indonesia has widened the exchange rate
band of the rupiah three times. The first rise was in January
last year when the band was raised from Rp 10 to Rp 20, the
second in September last year from Rp 20 to Rp 30 and the third
last June from Rp 30 to Rp 44.

The rupiah closed on the foreign exchange market at Rp 2,991
on Thursday, the central bank's last day of foreign exchange
trading. Trading will resume on Jan.2. (rid)

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