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)