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August 5, 2008

Indonesia central bank to use all tools to curb inflation
Indonesia’s central bank Monday said it would use all its monetary tools to bring inflation under control, resulting in expectations it might do more than raise interest rates at a policy meeting on Tuesday, reported Reuters.

Similar comments by Bank Indonesia Governor Boediono and Senior Deputy Governor Miranda Goeltom suggested the central bank might also raise bank reserve requirements, which boosted yields on one-month central bank debt.

In addition, debt markets speculated that the central bank would allow commercial banks to use government bonds to meet the reserve requirements, which drove yields on 5-year government bonds down.

“The central bank may revise the reserve requirement ruling under which commercial banks may be encouraged to hold long-term bonds. As a result, excess liquidity will be absorbed as the commercial banks’ funds would be locked long term,” said economist Juniman of Bank Internasional Indonesia.

In July, Budi Mulya, a deputy governor at the central bank, said the central bank could raise reserves.

Annual inflation in July rose to a stronger-than-expected 11.9 percent, its highest in close to two years, as the impact of a rise in domestic fuel prices continued to feed into the consumer price index.

A Reuters poll on Friday just after the latest inflation data was released showed that all 14 analysts surveyed expected the central bank to raise its key rate by 25 basis points to 9.00 percent, which would be the highest rate in more than a year.

Asked when inflation would start to ease, Boediono told reporters “within two months.”

“I’m very certain that we can drag this down to single digits in 2009. We will use all of our tools,” he said.

Separately, Goeltom said “anything is possible” in the central bank’s bid to curb inflation, which has accelerated for seven consecutive months.

Inflation has surged to double digits after the government raised domestically controlled fuel prices to offset an unsustainable subsidy bill.

Boediono did not explain why he thought inflation might pull back, although he has previously said that inflation would fall as the impact of the May fuel price rise subsided. But some analysts are skeptical.

They said they expect prices for food, which has a large weighting in the CPI, to remain high ahead of the Eid al-Fitr Muslim celebration in October.

The holiday marks the end of a month of fasting in the world’s most populous Muslim nation.

The central bank currently sets the minimum reserve requirements at between 5 and 13 percent of rupiah deposits depending on loan-to-deposit ratios and the amount of deposits.

Speculation about higher reserve requirements, the funds commercial banks have to set aside at the central bank, has pushed up yields on 1-month central bank securities.
But it pushed yields down on 5-year government bonds in anticipation that commercial banks will buy that maturity to use as reserves with the central bank.

“As an option, this minimum reserve requirements instrument is still on the table,” Deputy Governor Mulya said in July.

Analysts say the central bank is also trying to use the exchange rate to curb inflationary pressures. The rupiah is up almost 3.3 percent against the dollar this year.

Bank Indonesia, like other central banks in Asia, is trying to fight off inflation without curbing economic growth, which came in at 6.3 percent in 2007.

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