Bloomberg News

Indonesia Seeks Higher Short-Term Yields to Absorb Funds

March 09, 2012

Bank Indonesia is seeking to increase yields on its short-term securities to absorb liquidity from the financial system and ease inflation pressures stemming from credit growth and a government plan to raise fuel prices.

The central bank is studying the use of its reserve requirement rule to reduce the excess funds, Governor Darmin Nasution said in Jakarta today, adding that it’s not the preferred policy tool. The measure aims to counter an expected surge in inflation once the government carries out its plan to raise the price of subsidized fuel, he said.

Indonesian policy makers held interest rates yesterday after an unexpected cut in February as inflation in Southeast Asia’s biggest economy slowed for a sixth straight month. Economists at Barclays Capital and Maybank Banking Bhd. questioned the reduction that came a month after Bank Indonesia widened the lower range of its interbank lending rate in a de facto easing of monetary policy.

There’s a “growing recognition that strong domestic demand and excess short-term liquidity provide fertile ground for larger second-round inflation effects,” said Aninda Mitra, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “This also weakens the argument that low policy and intervention rates are an effective and relatively costless way of getting around the structural impediments to poor monetary transmission.”

Guaranteed Rates

The central bank said in a statement yesterday it will focus on “strengthening monetary operation and managing short- term excess liquidity” to minimize temporary inflation pressures.

Indonesia’s deposit insurance agency lowered its maximum guaranteed interest rate on rupiah-denominated deposits to 5.5 percent from 6 percent today. Lembaga Penjamin Simpanan, which guarantees deposits at banks in Indonesia, also cut the maximum guaranteed interest rate on dollar-denominated deposits to 1 percent from 1.25 percent.

“Steps addressing transmission failures have begun,” Mitra said. “We would not be surprised to see Bank Indonesia recourse to liquidity tightening measures such as upward adjustments to statutory reserve requirements” should inflation reach the upper end of its target in coming months, he said.

To contact the reporter on this story: Novrida Manurung at nmanurung@bloomberg.net

To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net


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