Central Bank to tighten liquidity to help ailing rupiah

JAKARTA (JP): Bank Indonesia will continue to tighten domestic liquidity conditions in a bid to help stabilize the weakening rupiah, according to central bank deputy director of economic and monetary research Halim Alamsyah.

Halim said that the central bank aimed at bringing down the size of base money to below April's Rp 86 trillion target by the end of this week.

"We'll try to control the monetary condition more carefully ... we'll adopt a tight bias (policy)," he told The Jakarta Post on Tuesday.

"But this doesn't mean that we're going to raise interest rates," he added.

Halim explained that the central bank's tighter liquidity measure did not have to be accompanied by higher interest rates because domestic banks currently had excessive liquidity, enabling them to purchase Bank Indonesia notes at the current low interest rates.

He said the size of the base money over the past couple of weeks was already about Rp 90 trillion, or above target.

"So we tend to be more tight," he said, adding that the policy was taken at the recent central bank board of governors meeting.

Halim was responding to the current weakening of the value of the rupiah against the U.S. dollar.

The rupiah closed lower on Tuesday at Rp 7,733 against the U.S. dollar from Rp 7,675 previously. The rupiah has been indirectly affected by the bearish sentiment in the world stock market as well as by Standard & Poor's cut in the country's credit ratings.

The government and the central bank has targeted the rupiah to be trading at Rp 7,000 per U.S dollar this year.

Halim said the central bank had previously anticipated the decline in the U.S. stock market.

He also said the current weakening of the rupiah was not yet worrying.

"The market still thinks that this (weakening) is temporary," he said.

He pointed out that the rupiah long-term premium swap was relatively unchanged at less than 3 percent, which meant that the rupiah was not likely to depreciate further in the future.

He said the premium swap in 1998 was between 15 percent to 20 percent when the rupiah plunged to a record level.

"But we'll continue to watch closely exchange rate developments," he said.

Halim said the important thing for the central bank was to make sure the weakening of the rupiah did not threaten its inflation target for this year.

He said that if the current weakening of the rupiah was sustained, it would ignite inflation.

He said that although the impact the weakening rupiah had on inflation would not be significant, it would not be "conducive" to the central bank's monetary policy amid the current expectation of higher inflation due to a planned increase in fuel prices.

The central bank's underline inflation target for this year is 3 percent to 5 percent, or 5 percent to 7 percent if the planned increased in fuel prices is taken into account.

Meanwhile, the central bank said in a weekly report that the country's net foreign exchange reserves fell by US$318 million to $18.31 billion per April 14 from the level last week.

Bank Indonesia said the decline was due to overseas debt repayments, including payments to the Japanese Exim Bank.

But the central bank said net foreign exchange reserves were still above the $14 billion target as agreed with the IMF.

Bank Indonesia added that gross foreign exchange reserves, which are net foreign exchange reserves plus outstanding foreign exchange contracts, fell slightly by $335.90 million to $29.51 billion. (rei)