Central Bank to raise benchmark interest rate

Central Bank to raise benchmark interest rate

Urip Hudiono, The Jakarta Post

The central bank announced it would raise its benchmark interest
rate and continue to intervene in the supply of dollars to the
market, in an effort to keep the rupiah on a shorter leash.

"We will raise the interest rate higher than usual to absorb
excess liquidity, as well as anticipate higher inflation," Bank
Indonesia Governor Burhanuddin Abdullah said on Wednesday.

"We will also be prepared to smoothen out the rupiah's
volatility by going into the market to fulfill demands for
dollars. We have done that over recent days."

Burhanuddin said an aggressive increase in the benchmark
interest rate on Bank Indonesia promissory notes (SBI) was
necessary to absorb recent excess liquidity in the market, which
could affect the rupiah.

"The government's cancellation of its bond offering on Tuesday
caused an excess liquidity to linger in the market, which could
be used to buy dollars," he said. "For that, we have to absorb
this liquidity by raising the SBI interest rate."

The interest rate on the one-month SBI has risen by one basis
point -- or 0.01 percent -- in the first quarter of this year.
The interest rate stood at 7.44 percent on March 16, up from 7.43
percent on March 2.

Burhanuddin said the main reason for the recent slide in the
rupiah was the high demand for dollars from foreign companies
working in the country.

"It is normal in March for Japanese companies in Indonesia to
repatriate their profits," he said, adding that many foreign
investors were selling shares in the country's stock market and
taking their profits.

Currency market analysts say demand for dollars has also
increased at state oil and gas company Pertamina, which must
spend about US$1 billion each month to import crude oil to meet
domestic demand.

Indonesia's currency market, Burhanuddin said, has also shrunk
to between $300 and $400 million in transactions per day,
compared to pre-1997 financial crisis levels of $12 billion in
transactions a day, making the market more sensitive to supply
and demand.

Following Bank Indonesia's statement, the rupiah rose by 0.3
percent to close at Rp 9,496 against the US dollar, after falling
to a nine-month low of Rp 9,536 on Tuesday.

Burhanuddin said the central bank's intervention in the market
was meant only to cut down on the rupiah's volatility, not to
bring the exchange rate to a particular level.

"Our policy, according to our own laws, is to apply a free
currency market and a floating exchange rate," he said. "Even if
there is a mention of the rupiah's exchange rate in the state
budget, it is only an assumption, not a target to be fulfilled."

The government has set the exchange rate at Rp 8,900 in the
2005 state budget revision draft, from the previous assumption of
Rp 8,600.