Bank Indonesia warned against interest rate cuts<\/p>\n
JAKARTA (JP): Analysts have warned Bank Indonesia (BI) against
\njoining the regional sentiment to cut interest rates, following
\nthe United States Federal Reserve's move to cut theirs, saying
\nthat it could risk an outflow of capital.<\/p>\n
According to the analysts, Indonesia's economy is much too
\ndependent on political and security issues which could offset any
\npositive impact an interest rate cut might hold for the economy.<\/p>\n
"In Indonesia, it's non-economic factors that drive the
\neconomy," Faisal Baasir, of the House of Representatives'
\nCommission IX, told The Jakarta Post over the weekend.<\/p>\n
While investment could remain low despite an interest rate
\ncut, the move could also risk encouraging capital flight, he
\nsaid.<\/p>\n
Baasir suggested that the central bank be extra careful in
\nstudying the moves taken by other countries in response to the
\nFederal Reserve (Fed)'s decision to cut interest rates.<\/p>\n
The Fed last week cut its federal fund rate by one-half of a
\npercentage point to 6.0 percent -- the biggest reduction in more
\nthan eight years -- in a bid to stave off a full blown recession
\nin the U.S. economy.<\/p>\n
Asian countries are likely to follow, with the Hong Kong
\nMonetary Authority already cutting its base rate by half a
\npercentage point to 7.5 percent.<\/p>\n
Analysts have predicted that the Philippines and Australian
\ncentral banks would follow suit, although the signals in other
\nAsian countries remained unclear.<\/p>\n
BI governor Sjahril Sabirin said earlier that he would watch
\nthe development of the rupiah's exchange rate to decide what to
\ndo with interest rates.<\/p>\n
The central bank has kept the exchange rate high partly due to
\nlast year's strong inflation, to which a weak rupiah contributed<\/p>\n
Baasir said that the Fed's interest rate cut would actually be
\na good opportunity for Indonesia to lower its rates, if it were
\nnot for the poor investment climate in this country.<\/p>\n
However, he expected that the Fed's interest rate cut would
\nspeed up Indonesia's economic recovery by allowing a greater
\ninflux of foreign capital.<\/p>\n
Economist Pande Raja Silalahi warned against an interest rate
\ncut, saying that it might further discourage capital inflows.<\/p>\n
Pande said that Indonesia could not simply follow the moves of
\nother countries.<\/p>\n
BI, he said, must carefully weigh the benefits of lowering
\ninterest rates to boost investment and the risk of losing
\ncapital.<\/p>\n
A recently issued government regulation which hiked income tax
\non term deposit interest to 20 percent, was already hurting
\nefforts to lure foreign capital, he said.<\/p>\n
"If BI wants to cut its interest rates, then it must carefully
\nsearch for the appropriate level where investing in bank savings
\naccounts remains attractive to the public," Pande said.<\/p>\n
An interest rate cut, he warned, should also not exceed
\nthe interest rate cuts of neighboring countries, thus reducing
\nthe higher margin of BI's rates.<\/p>\n
"We must try to keep our margin level competitive against our
\nneighbors," Pande said.<\/p>\n
But even if interest rates were to be lowered, he went on,
\nbanks were still reluctant to channel loans.<\/p>\n
Prevailing security concerns and legal uncertainties remained
\nthe biggest obstacles for banks in channeling their funds, Pande
\nexplained.<\/p>\n
"The impact of lower interest rates is less significant than
\nthat of the present security disturbances," he said.<\/p>\n
Some banks are also refraining from extending loans for fear
\nthat they could harm their capital adequacy ratios (CAR).<\/p>\n
The CAR measures a bank's weighted average risks against its
\ncapital. This year, banks are required to raise their CAR to a
\nminimum of eight percent from the present four percent.<\/p>\n
Senior banker I Nyoman Moena said he was against the option of
\nBI lowering the interest rate.<\/p>\n
He said BI would be better advised to keep the current
\ninterest rate unchanged or to raise it.<\/p>\n
According to him, Indonesia should seize the opportunity to
\nlure in foreign capital by offering more attractive interest
\nrates.<\/p>\n
"We assume here that the investment flow to Asian countries
\nwill increase because of the Fed's decision," he said.<\/p>\n
But he added that the present high interest rates continued to
\nblock the country's export growth, which had been hovering at $5
\nbillion a month.<\/p>\n
"It's a vicious circle," he said.<\/p>\n
BI could either lower its interest rates and spur exports with
\nthe risk of capital flight, or hike rates to attract capital at
\nthe expense of export growth, he said.<\/p>\n
To reduce dependence on foreign investment, he continued,
\nIndonesia should foster the growth of agricultural-based
\nexports.(bkm)<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/bank-indonesia-warned-against-interest-rate-cuts-1447893297",
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