Indonesia Central Bank moves to mop up excess liquidity

* Dollar reserve requirements raised to 5 pct in March, 8 pct June
* Short term foreign borrowing by banks capped at 30 pct of capital
* Banks must disclose prime lending rates from March

Indonesia's central bank moved on Wednesday to mop up excessive liquidity and encourage more lending, announcing fresh measures that sought also to protect Southeast Asia's biggest economy against new inflationary pressures.\

Bank Indonesia said the minimum dollar reserve requirement for commercial banks would be raised to 5 percent of total deposits from March 1 and to 8 percent on June 1, from the current 1 percent.

A rise to 5 percent in dollar reserve requirement -- which banks store at the central bank -- was expected to absorb $1.5-2.5 billion from the market, while the rise to 8 percent could absorb $3 billion, deputy bank governor Budi Mulya told a news conference.

Indonesian officials have tried channeling strong capital flows into the country towards longer-dated investments for fear a change in risk sentiment may trigger a "hot money" reversal, hurting the local currency and financial stability.


DARLING OF EMERGING MARKETS
Indonesia has been a darling of emerging market investors this year. The currency has risen nearly 3.5 percent and the stock market 40 percent -- driven by strong domestic consumption.

Foreigners have so far this year bought net 86.8 trillion rupiah ($9.6 billion) worth of Indonesian government bonds and 9.7 trillion rupiah of central bank SBI debt, latest Bank Indonesia data shows.

But Indonesia joins countries from South Korea to Brazil that have implemented stricter measures to protect their economies from a tide of capital, although Jakarta's steps have been more modest.

"The concern could stem from the fact that most foreign investors buying local assets exchange their dollar liquidity for rupiah via local commercial banks, which could lead to an alarming situation and create rupiah instability should there be a sudden and massive unwinding," Enrico Tanuwidjaja, an economist at OSK-DMG in Singapore, said of the new measures.

"I think Bank Indonesia is trying to ensure that local banks employ closer monitoring of their U.S. dollar banking books."

The central bank on Wednesday also capped banks' vostro accounts at a maximum 30 percent of capital beginning end January, with a three-month transition time. Vostro accounts are rupiah deposits in commercial banks held by foreigners and considered a form of short-term borrowing by the institution.

Inflation, the Achilles heel of Southeast Asia's largest economy, may yet prevent growth from reaching 6-6.5 percent as expected next year. Local food prices have been creeping up as heavy rains have affected commodities, while the partial end to a pump price subsidy on fuel and new taxes on vehicles will also be felt. 

BENCHMARK RATE STABLE

Governor Darmin Nasution said on Wednesday that the central bank would keep its benchmark interest rate -- which has been at 6.5 percent for over a year -- consistent with the inflation target range of 4-6 percent in 2011, and 3.5-5.5 percent in 2012. 

"Although we think that they will eventually raise interest rates in April 2011, there is a risk of them being reactive, instead of pre-emptive, in doing so," said Helmi Arman, an economist at Bank Danamon. 

"Capital inflows have been a key concern among policy-makers. So far Bank Indonesia has taken liquidity management measures to mop up liquidity and sterilize their foreign exchange intervention." 

On Wednesday Bank Indonesia also announced that commercial banks with assets of more than 10 trillion rupiah would be required to disclose their prime lending rates starting March 31. 

The regulation may bring down rates and spur more lending to businesses which frequently complain about the high rates demanded by commercial banks, which currently hover around 14-15 percent. 

Deputy governor Muliaman D. Hadad said banks would have to disclose their base lending rates for corporates, retails and consumers, both mortgage and non-mortgage. This year's lending was estimated to grow by 22 percent, he said, and between 22-24 percent next year. ($1 = 9,017 rupiah). Source: Reuters