Rupiah drop still under control, says BI chief

Rupiah drop still under control, says BI chief

Tony Hotland, Jakarta

The current depreciation in the rupiah against the U.S. dollar
would not have a severe impact on the economy as it is still
manageable, Bank Indonesia Governor Burhanuddin Abdullah said on
Thursday.

He said that the central bank's main policy to help arrest the
fall in the rupiah was by absorbing excess liquidity in the
banking sector.

"Of all the worst scenarios we can think of, the impact will
still be in a corridor that we can handle. No need to worry, it's
not that bad since our condition is better than in 1997/1998,"
said Burhanuddin Abdullah, referring to the regional financial
crisis in the late 1990s.

He was speaking at a meeting with House of Representatives
Commission IX on financial affairs to explain the central bank's
strategies to handle the weakening rupiah.

Burhanuddin said that BI would maximize its efforts to absorb
excessive liquidity in order to minimize space for banks to
speculate against the local unit.

"We'll do it through the SBI promissory notes auctions, a
tighter policy on the minimum bank reserve requirement, and the
intervention rate. The important thing is how to keep the
inflation rate favorable to our economy," he said, referring to
the Bank Indonesia SBI promissory notes.

Bank Indonesia has recently introduced a number of measures,
including increasing the bank reserve requirement to between 6
percent and 8 percent in a bid to mop up excess liquidity.

The rupiah recently dropped to a 26-month low as the looming
interest rate hike in the U.S. triggered a switch to dollar-based
assets, while political uncertainty at home in the run up to the
July 5 presidential election had further dampened sentiment in
the local unit.

The local currency has slightly strengthened following Bank
Indonesia's tightening measures. The local unit closed on
Thursday at Rp 9,405 per U.S. dollar, relatively unchanged from
Wednesday's close of Rp 9,400.

The sharp drop in the rupiah has sparked inflation concerns,
particularly coupled with rising oil prices.

But Burhanuddin played down such fears, saying that inflation
this year would not surpass the government's target of 6 percent
to 7 percent.

A number of analysts have also suggested that the central bank
push the interest rate higher to curb inflation and help defend
the rupiah, a move which has been avoided by the central bank as
it would slow down the country's economic growth.

Central bank officials have said that the bank would not
increase interest rate here if the U.S. Federal Reserve only
raise its rate by 25 basis points, as many expected.

Meanwhile, BI deputy governor Hartadi Sarwono said that the
central bank was also cooperating with other central banks in the
region, including the ASEAN-plus-three countries (Japan, Korea
and China) in a bid to protect the local currencies.

"We have what we call a bilateral swap arrangement with the
central banks of those countries. Under the arrangement, there
are funds of up to $5 billion that we can periodically borrow.
But in this kind of situation, we don't think we need to go there
yet," he explained.