Analysts don't expect big hike in interest rates<\/p>\n
JAKARTA (JP): Experts expect the current increasing trend in
\ndomestic interest rates aimed at providing support for the
\nbeleaguered rupiah will only be limited and temporary.<\/p>\n
Senior banker I Nyoman Moena said on Saturday that the
\neffectiveness of using monetary instruments to restrain the
\ndecline of the rupiah against the U.S. dollar would be minor
\nbecause the main pressure for the currency was no longer economic
\nfactors but concern over the country's political situation.<\/p>\n
"Raising interest rates and market intervention will no longer
\nbe effective in influencing the rupiah's exchange rate because
\nthe pressure on the rupiah is not coming from economic factors
\nbut from the people's perception that things will get worse as
\nthe general election approaches," he said.<\/p>\n
"So the increase in interest rates will be very limited," he
\nadded.<\/p>\n
Bank Indonesia's benchmark one-month promissory note (SBI)
\ninterest rate rose to 35.89 percent in last week's auction. This
\nis the second consecutive increase this month amid strong
\npressure on the rupiah, which dropped to a two-month low of Rp
\n9,200 to the dollar on January 13.<\/p>\n
The local unit closed at Rp 8,925 to the dollar on Friday.<\/p>\n
IMF Asia Pacific's director Hubert Neiss said on Friday that
\nfurther increases in Indonesian interest rates could not be ruled
\nout in the wake of the plunging rupiah.<\/p>\n
The currency tumbled on various factors, particularly the
\ncontagion effect from the devaluation of Brazil's real, fresh
\nriots in several parts of the country and expectation of students
\nreturning to the street this week.<\/p>\n
The rupiah managed to hover at between Rp 7,500 and Rp 8,000
\nduring the last couple of months of last year, which was a
\nsignificant improvement on a more than Rp 15,000 in June and
\nJuly.<\/p>\n
The stabilizing currency had provided the central bank with
\nmore room to allow the SBI interest rate to fall to 35 percent
\nearly this year, compared to more than 70 percent in August last
\nyear.<\/p>\n
Bank Indonesia's director Miranda Goeltom admitted on Friday
\nthat the central bank had to tightened monetary conditions to
\nminimize the volatility in the rupiah resulting from increasing
\nuncertainties.<\/p>\n
"But the increase in the SBI (interest rates) is not so big.
\nIt's a very normal thing to happen in times when our currency is
\nunder pressure to provide a higher return on investment," she
\nsaid.<\/p>\n
She did stress, however, that domestic interest rates could
\nfall to below 30 percent before the end of March as long as
\nuncertainties in the political situation and the bank
\nrecapitalization plan can be minimized.<\/p>\n
She said that it was not to the benefit of the central bank to
\nimpose a high interest rate policy.<\/p>\n
Pande Raja Silalahi, an economist at the Center for Strategic
\nand International Studies, said the decision by the central bank
\nto allow the SBI interest rates to move higher would only be a
\ntemporary measure to reduce the volatility in the rupiah.<\/p>\n
"I think the monetary authority will remain with its
\ncommitment to continue reducing domestic interest rates," he
\nsaid.<\/p>\n
He also agreed with Moena's view that if the pressure on the
\nrupiah was coming from political worries and a lack of confidence
\nin the current transitional government, employing a high interest
\nrate policy would not be effective in defending the battered
\ncurrency.<\/p>\n
"The confidence problem should be solved first," he said.<\/p>\n
A "favorable" interest rate level is seen as a key to solving
\nthe country's battered real sector and banking industry.<\/p>\n
The government started employing a tight monetary policy last
\nyear, as prescribed by the IMF, to curb inflation and stabilize
\nthe currency.<\/p>\n
The high interest rate policy received widespread criticism as
\nit had dragged the country -- and other IMF patients Thailand and
\nSouth Korea -- into a deeper recession.<\/p>\n
The IMF last week admitted it had made some mistakes in
\nhandling the Asian crisis, but maintained that its tight monetary
\npolicy was the right prescription. (rei)<\/p>",
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