Indonesia signals growth before rupiah's strength

Indonesia signals growth before rupiah's strength

SINGAPORE (Reuter): Indonesia's latest interest rate cuts are
designed to signal that it is not prepared to defend its
currency, the rupiah, at the cost of economic growth, analysts in
Singapore said.

The central bank of Indonesia cut domestic interest rates on
its short term certificates (SBI) for periods of one week and
above by 50 basis points on Friday.

"The Indonesians don't want the sacrifice that currency
defense entails," said Vincent Low, fixed income strategist at
Merrill Lynch.

The central bank cut seven-day interest rates to 9.5 percent,
two week rates to 10 percent and one month money to 10.625
percent. But it left the overnight SBI rate at a steep 14 percent
to help prevent a sudden fall in the currency.

"In the wake of the baht crisis, central banks around Asia are
looking for an optimal mix between exchange rates, interest rates
and economic growth," Low said.

"Implicit in the Indonesian move is a signal that they don't
want to see weaker growth."

The Indonesian rate move came the day after a rout on the
Jakarta stock market, where the key composite index on Thursday
suffered its second steepest intra-day fall. The index ended the
day down 3.13 percent, but steadied a bit on Friday to finish the
week down by around 6.5 percent.

"The Indonesians have been supporting their currency by high
interest rates, and this caused a crack on the stock market,"
said Desmond Supple, head of Asian currency research at BZW Asia.

The looser monetary policy signaled by Friday's move helped
the dollar strengthen against the rupiah, but demand for rupiah
by state banks in Jakarta has kept the rate near the 2,600 level.

"The Bank of Indonesia put across the view (last) week that
the tight liquidity conditions would ease, and also reaffirmed
its commitment to the flexible exchange rate and that helped to
calm sentiment in terms of the rupiah market," said Andrew Dermot
Fung, regional treasury economist at Standard Chartered Bank.

One dealer at a U.S. bank in Singapore said: "The central Bank
has indicated it's happy with a range between 2,555 and 2,610."
The Bank of Indonesia's official permitted trading band runs from
2,378 to 2,682 rupiah to the U.S. dollar.

With the rupiah at the weaker end of the current ranges,
speculation has arisen in Singapore markets about whether the
bank would defend the official trading band if the rupiah were to
fall further.

But after Friday's move on interest rates, analysts doubt the
central bank would fight to hard to save the existing system.

"Even if they were looking to do something with the band, the
next logical step would be to do away with it altogether," Fung
said.