Indonesia to Limit Rupiah Gains From Tax Amnesty Inflows

Updated on
  • Currency rallied 1.2% after parliament passed amnesty bill
  • Economic growth seen reaching 5.3% in fourth quarter

Indonesia’s central bank said it will intervene in the foreign-exchange market to prevent the rupiah from gaining too much from a possible increase in inflows following a recently passed tax amnesty law.

Bank Indonesia expects the program to result in excess funds in the market, which it can absorb using its instruments in the currency spot market and through deposits, Deputy Governor Hendar told reporters in Jakarta late on Tuesday.

The rupiah rallied 1.2 percent against the dollar after the parliament passed a bill on Tuesday that allows individuals to declare and repatriate previously unreported assets held abroad. The central bank estimates the amnesty -- which takes effect in July -- will draw back 560 trillion rupiah ($42.6 billion) of inflows.

“After the tax amnesty was passed, positive sentiment has returned,” Senior Deputy Governor Mirza Adityaswara told reporters. “The most important thing for Bank Indonesia is that the situation remains stable. Too much rupiah weakness isn’t good, but if it strengthens too fast then that’s also not good.”

The currency advanced 0.1 percent to 13,157 a dollar as of 5:20 p.m. in Jakarta, taking its gain since the beginning of the year to 4.8 percent. The Jakarta Composite Index entered a bull market, gaining 2 percent on Wednesday.

The central bank plans to issue rules on money markets and negotiable certificates of deposit while also considering to extend the maturity of its foreign-exchange bills to absorb the inflows.

Deputy Governor Perry Warjiyo told reporters on Wednesday that the tax amnesty may enable further easing of monetary policy as the currency strengthens and inflation slows. He said the rupiah will probably gain further, while consumer-price growth will reach 3.9 percent by the end of the year.

Bank Indonesia cut its benchmark interest rate for the fourth time this year in June, lowering it by 25 basis points to 6.5 percent, while also easing macro-prudential measures aimed at boosting lending. The inflation rate dropped 3.3 percent in May, the lowest in more than six years.

— With assistance by Yudith Ho

(Updates with comments on monetary policy in last paragraph.)
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