Dollar-rupiah band widening 'preemptive'

Dollar-rupiah band widening 'preemptive'

TOKYO (Reuter): The widening of the dollar-rupiah band was a preemptive move, Indonesia's central bank Governor Soedradjad Djiwandono said here yesterday.

Soedradjad said that with recent regional developments and currency volatility, widening the band was "an effective measure to hedge our own reserves, so not to be influenced, so not to be dictated by the developments of the market".

Indonesia's central bank surprised markets last Friday by widening the dollar-rupiah band to 12 percent from eight percent following recent de facto devaluations of the Thai baht and the Philippine peso.

"We didn't make it free but very flexible but we still have this kind of band to tell the market this is the kind of area we more or less tolerate," Soedradjad told Reuters Financial Television.

Asked if further widenings in the band were possible, he said: "I am a very pragmatic man. I look to see what is going on in the market."

He said his position presented many dilemmas -- if he moved too early he would be accused of nervousness and if he moved too late he would be criticized for not anticipating events. "Preemptive is a good word for me," he said.

He said previous widenings of the band had worked well, adding that the planned listing of the rupiah in a futures contract launched by FINEX, the financial products division of the New York Cotton Exchange, was a factor.

He said the rupiah itself was not under attack. Indonesia felt very comfortable with its $21 billion in reserves -- equivalent to five and a half months of Indonesian import needs -- and the central bank had not intervened in the market since 1995.

Soedradjad, who is in Tokyo for a meeting of the Consultative Group on Indonesia (CGI), a grouping of donor nations led by the World Bank, said he had met with Bank of Japan Governor Yasuo Matsushita to explain Indonesian and regional developments.

He said he had told Matsushita, as he had told parliament, that he felt "fundamentals to be stronger than projected by the media".

Asked to confirm that even if Southeast Asian currencies depreciated considerably that it would not lead to a rethink on Indonesia's own depreciation policy, Soedradjad said, "Yes, I think so, that's the way I put it."

Policy

Indonesia has a policy of managed depreciation for the rupiah.

He said that Indonesian exports were "not bad considering the whole situation".

While export growth was not as high as in the past, this was a problem affecting the whole region and that even given this, Indonesia had a better growth rate than other developing countries, he said.

The central bank governor said he expected growth of around seven to eight percent for the economy, that Indonesia was close to its inflation target of five percent and that current account growth should hopefully be sustainable.

Asked if there would be more scope for the central bank to lower interest rates if inflation came down, Soedradjad said, "I think so, yes," although he would not specify any levels.

He said that the central bank had often been accused of keeping interest rates high to promote capital inflows, but added that argument was unfair.

Demand for liquidity was very high because of active domestic demand and growth in consumption, he said.

Soedradjad said although Indonesia's savings rate was good it could be better and "if that is the case, then I believe interest rates will go down".

Soedradjad also said that Asian central banks had not used repurchase (repo) agreements to help the Thai central bank because they were slower than other measures.

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