New reserve rule will push down money supply: Report
New reserve rule will push down money supply: Report
JAKARTA (JP): The country's primary money supply increased by
Rp 4.86 trillion in February to Rp 29.89 trillion following the
introduction of a new reserve requirement, according to Bank
Indonesia's annual report.
The average money multiplier of the narrowly defined money
supply declined to 1.81 points last fiscal year from 2.03 the
previous fiscal year, while the average money multiplier of the
broad money supply dropped to 7.63 from 8.31.
Bank Indonesia said that the drop in the money multiplier was
expected to further push down the money supply in the current
fiscal year.
The growth rate of the narrowly defined money supply, which
dropped to 14 percent in February, rose again to 18.4 percent in
March. The downward trend in the money supply is expected to
continue despite the increase in March, given the significant
growth in the primary money supply.
The growth rate of the average money multiplier dropped to
21.5 percent in 1995/1996 from 22 percent in the previous fiscal
year.
Net foreign assets contributed around Rp 9.1 trillion to the
expansion of the average money multiplier, which reached Rp 232.5
trillion as of March, the end of the 1995/1996 fiscal year. In
the previous year, the net foreign assets suffered a contraction
of Rp 4.1 trillion.
According to Bank Indonesia, the substantial growth in the net
foreign assets in 1995/1996, was fueled by a significant increase
in foreign direct investments and the massive inflow of offshore
funds.
The foreign assets were used as loans by financial
institutions and as financing sources by the private sector, the
report said.
The report said the increase in offshore funds was fueled by
the high differential of interest rates at home and those
overseas, in addition to an improvement in the performance of the
domestic capital market.
The central bank's tight monetary policy significantly eased
the liquidity which, in turn, pushed up the domestic interest
rates. As a result, local interest rates stayed high through the
year while the direction of overseas interest rates was mostly
downward. This condition made the local money market very
attractive.
In order to minimize the negative impact of speculative
trading on the money market, the central bank widened in June
last year the spread of conversion rates of the rupiah against
the dollar from Rp 30 to Rp 44. The spread between the selling
and buying rates of the rupiah against the dollar was merely Rp
10 in 1992.
In July 1995, the central bank also lifted the swap facility
in a bid to improve the role of commercial banks in foreign
exchange transactions. In addition, Bank Indonesia also widened
the rupiah-dollar intervention band to Rp 66 or 3 percent. The
band was further widened last week to Rp 118 or 5 percent.
According to the report, the expansions in the spread of the
conversion rate and the intervention band have significantly
strengthened foreign exchange trading on the domestic market.
Commercial banks' dependence on the central bank in foreign
exchange transactions could be also be reduced.
Interbank transactions of foreign exchange rose significantly
to $1.06 trillion in 1995 from $822.7 billion in 1992. The
transactions of foreign exchange between commercial banks and the
central bank, in turn, declined to $6.7 billion from $11 billion.
(hen)