Central bank seeks tame inflation and stable rupiah

Central bank seeks tame inflation and stable rupiah

Karen Lane, Dow Jones/Hong Kong

Tighter central bank rules on foreign exchange trading unveiled
by Indonesia recently are aimed primarily at stemming inflation
and the weaker rupiah that is accompanying it, Miranda Swaray
Goeltom, senior deputy governor of Bank Indonesia said on
Thursday.

"We are not targeting the exchange rate, that is very clear,
but we also understand that there is a pass-through effect of the
depreciation of the rupiah," she told Dow Jones in an interview.

"Hence too much weakening of the rupiah is not something that
we would like to see."

Miranda was in Hong Kong to attend Euromoney's Asia Pacific
Bond Congress.

Bank Indonesia said late on Wednesday it was tightening rules
on foreign exchange transactions starting July 14.

The new rules will cut foreign exchange derivative
transactions with foreign counterparts against the rupiah to a
maximum of US$1 million from a previous $3 million. Dollar
purchases in outright forward transactions and swaps are also
limited to $1 million.

These previously weren't subject to a cap.

The central bank has also imposed a three-month minimum
investment hedging period on foreign exchange transactions.
Previously there were no minimum periods.

The central bank's goal is to shape inflation expectations and
to ensure a stable rupiah.

"We are not targeting the (rupiah) level, we are trying to
reduce the volatility," she said.

The Indonesian currency -- currently around Rp 9,620 to the
U.S. dollar -- slipped to a three-year low of Rp 9,805 to the
dollar at the end of April, in part due to massive dollar buying
by the state oil firm Pertamina.

The central bank hopes the new rules will reduce any foreign
exchange movement that isn't related to a genuine underlying
need.

The new foreign exchange measures, which Goeltom called
"temporary", would be lifted when the central bank is
"comfortable with the situation."

Goeltom declined to say what kind of situation would spur the
central bank to lift the measures but said it was seeking tamed
inflation and a stable rupiah "at whatever level that is."

The inflation rate surged to a three-year high of 8.81 percent
in March when the government raised domestic fuel prices, but has
since fallen back to 7.4% in May, just below the government's
targeted 2005 inflation rate of 7.5 percent.

In an ongoing effort to tame price increases, the government
will also continue to hike interest rates at the recent pace.

The recent speed of monetary tightening would continue "up
until at least toward the end of the year, then we will see some
slowing down in the increase in interest rates," she said.

Indonesia has been pursuing steady hikes in interest rates,
with the rate on the one-month Sertifikat Bank Indonesia notes
now around 8.06 percent.

Miranda predicted the spot U.S. dollar demand from Pertamina
would soon ease given higher funds that the parliament has
recently agreed to extend to the firm for subsidies.

The additional funds would allow the firm greater scope to buy
U.S. dollars through markets other than the spot market, helping
to ease upward pressure on the U.S. dollar against the local
unit, she said.