Bank Indonesia allows flexible rupiah to save ammunition for Fed

[JAKARTA] Bank Indonesia is allowing a more flexible currency to conserve foreign-exchange reserves in preparation for higher US interest rates.

"Everyone needs to be patient with a more flexible exchange rate within a manageable range that will make Indonesia's economic fundamentals healthier," said Nanang Hendarsah, a director at Bank Indonesia. "We need to conserve foreign-reserves ammunition to manage the currency." Federal Reserve Bank of Atlanta President Dennis Lockhart said on Tuesday that the US central bank is close to raising rates next month, which will put pressure on emerging-market currencies. Southeast Asia's largest economy is already grappling with a rupiah at its weakest in 17 years and growth that slowed for a second consecutive quarter.

The rupiah extended losses after Hendarsah's comments to close down 0.2 per cent at 13,515 a dollar on Wednesday, according to prices from local banks.

The falling rupiah has curbed room for the central bank to loosen monetary policy. Bank Indonesia has kept borrowing costs steady after joining global counterparts in a February easing. Its foreign reserves dropped US$7.5 billion in the four months through June to US$108 billion, the least in a year. Figures for July could come as early as Friday.

Without central bank intervention the rupiah would be much weaker, though the market would only be concerned if reserves drop below US$100 billion, said Eric Alexander Sugandi, a senior economist at Standard Chartered Plc in Jakarta.

President Joko Widodo, whose government has turned to tweaks in taxes and regulations in an effort to revive the economy and spur investor confidence, has ordered his ministers to avoid any further policy U-turns. The administration needs to be more consistent, Mr Hendarsah said.

"There can't be any more policy flip-flops," Mr Hendarsah said. "Inconsistency will make policy making lack credibility."

BLOOMBERG