Indonesia Raises Reserve Ratio to Aid Rupiah as Rate Held

Indonesia ordered lenders to set aside more funds in government and central bank bonds as slowing growth deterred policy makers from raising the key interest rate for a third meeting to support the currency.

The central bank boosted its secondary reserve requirement, comprising a combination of government bonds and Bank Indonesia certificates, to 4 percent from 2.5 percent, it said in Jakarta today. The benchmark reference rate was held at 6.5 percent, as predicted by 16 of 25 economists surveyed by Bloomberg News, with the rest forecasting an increase.

Indonesia is contending with easing growth at a time when higher fuel costs spurred the fastest inflation in more than four years and the rupiah trades at the weakest level since 2009. The central bank’s steps to support the currency have pushed foreign-exchange reserves to the lowest in nearly three years, forcing officials to use other policy tools to rein in liquidity and cool inflation expectations.

“The macro-prudential measures could tighten liquidity and provide some near-term support to the rupiah,” said Chua Hak Bin, an economist at Bank of America Corp. in Singapore. “We see limited near-term impact on the inflation dynamics from these measures. We think that inflation would likely head higher in the next two months.”

Subsidy Cuts

Consumer prices rose 8.61 percent in July from a year earlier after a 5.9 percent gain in June, the government said earlier this month. President Susilo Bambang Yudhoyono in June raised domestic fuel prices for the first time since 2008 to cut subsidy costs.

The rupiah fell 0.6 percent to 10,350 per dollar today, prices compiled by Bloomberg from local banks show. It has fallen about 7 percent so far this year and today touched its lowest level since June 2009.

The yield on 5.625 percent government bonds due May 2023 has climbed 2.05 percentage points in the past 12 months to 7.96 percent, prices from the Inter Dealer Market Association show. It reached 8.3 percent on July 16, the highest level since March 2011.

Bank Indonesia was the first in the region to raise benchmark rates this year. The monetary authority has also intervened to support the currency as the nation’s foreign-exchange reserves fell for a third month in July to $92.7 billion, data showed yesterday.

More Reserves

Indonesia last ordered banks to set aside more cash as reserves in 2010 after inflation accelerated. Lenders are currently required to set aside 8 percent of their deposits as primary reserves.

Primary reserves and the secondary reserve requirement are used to determine how much commercial lenders need to place in deposits at the central bank to manage liquidity in the banking system. Today’s move suggests an increase in reserve requirements of around $4 billion across the banking system, Roland Randall, a Singapore-based economist at Australia & New Zealand Banking Group Ltd, said in a note.

Bank Indonesia also said today the loan-to-deposit ratio, or how much of its funds a lender gives out in loans, should be between a range of 78 percent and 92 percent, from as much as 100 percent previously. Banks with loan-to-deposit ratios above the upper limit of the range, and a capital adequacy ratio below 14 percent, will have to put in additional reserves with the central bank, according to Credit Suisse Group AG.

Strengthen Banks

“The reinforcement of macro-prudential policy, including the optimalization of LDR-Reserve Requirement and Secondary Reserve Requirement is also aimed to strengthen the banks’ resilience in coping with risks as well as to maintain the financial system stability,” the central bank said in a statement today.

Monetary policy will focus on stabilizing the currency and inflation, and keeping the current-account deficit at manageable levels, Deputy Governor Perry Warjiyo said on Aug. 2. When the central bank is confident its targets are achievable, it will move toward supporting growth, Warjiyo said.

“The economy has slowed over the last 12 months and by aggressively tightening rates, the bank runs the risk of quelling domestic activity -- the main driver of growth,” Fred Gibson, a Sydney-based economist at Moody’s Analytics, said before the decision. “Tightening rates further would be a larger policy misstep.”

Gross domestic product grew 5.81 percent in the three months ended June 30 from a year earlier, compared with a revised 6.03 percent pace for the first quarter. The central bank sees expansion this year at the lower end of its forecast range of 5.8 percent to 6.2 percent, it reiterated today.

“Lukewarm exports, coupled with weaker purchasing power due to rising inflation, have slowed household consumption and non-construction investment,” the central bank said. “In the future, the risks of an economic downturn remains high.”

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