Central Bank to raise reserves requirement

Central Bank to raise reserves requirement

JAKARTA (JP): Bank Indonesia, the central bank, will raise the
requirement on banking reserves to curb the overheating economy,
official sources said yesterday.

Sources say the planned measure, to be announced today, will
require banks to raise their reserves to four or five percent of
their deposits from two percent at present.

Analysts say that raising the reserve requirement is an
appropriate choice given the fact that raising interest rates
alone is no longer effective in stabilizing the monetary system.

At present, the central bank uses interest rates on its
short-term Sertifikat Bank Indonesia promissory notes to control
the money in circulation.

However, higher interest rates often trigger a sharp increase
in the inflow of short-term funds from overseas, which
complicates the central bank's task of making the rupiah more
competitive and dealing with the volatility of short-term foreign
funds.

The broad money supply grew by over 26.5 percent in the first
nine months of this year, far higher than the 21.5 percent
increase in 1994/95, as the result of the excessive increase in
bank credits.

The Singapore-based research unit of JP Morgan says a tighter
policy is needed to offset the huge buildup of foreign and
domestic investment approvals.

According to Morgan, raising interest rates and the reserve
requirement are both essential to curb the growth in the money
supply.

Morgan added, however, that a money tightening policy will be
costly because higher interest rates will trigger new inflows of
short-term capital. In addition, higher interest rates will hurt
banks with bad loan portfolios.

But, a Morgan report said, "the cost of trying to muddle
through will be much higher if investors lose patience." (hen)