Indonesian banks ordered to set aside more funds

Indonesia’s forex reserves at three-year low.

Bank Indonesia, the central bank, has ordered lenders to accumulate more funds in government and central bank bonds. It has boosted its secondary reserve requirement consisting of a combination of government bonds and Bank Indonesia certificates to 4% from 2.5%. The benchmark reference rate, however, was firm at 6.5%.

Indonesia’s flagging economic growth is preventing policy makers from raising the key interest rate for a third time to support the rupiah, which is trading at its weakest level since 2009.

The central bank’s steps to support the rupiah have pushed Indonesia’s foreign-exchange reserves to the lowest level in nearly three years, forcing officials to use other policy tools to dampen liquidity.

Analysts said the macro-prudential measures could tighten liquidity and provide some near-term support to the rupiah but they also see limited near-term impact on inflation from these measures. They forecast inflation to rise in the next two months.

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

Yesterday’s move suggests an increase in reserve requirements of around US$4 billion across the banking system.