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.