BI keeps rate hike option on table<\/p>\n
Dadan Wijaksana and Rendi A. Witular, Jakarta<\/p>\n
The central bank says it is keeping open the option to increase
\nits key interest rate in a move to help stabilize the rupiah and
\ncurb inflationary pressure.<\/p>\n
Bank Indonesia said that it would maintain a \"tight bias
\nmonetary policy\" to ensure a medium-term inflation target of 6
\npercent to 7 percent.<\/p>\n
\"Bank Indonesia will try to optimally absorb excess liquidity,
\nwithout closing the door to an increase in the interest rate,\"
\nthe central bank said in a statement issued after its board of
\ngovernors meeting late on Tuesday.<\/p>\n
Earlier in the day, BI Governor Burhanuddin Abdullah told the
\ncapital market community in a ceremony: \"We are still open to an
\nincrease in interest rates because we can't sacrifice (monetary)
\nstability.\"<\/p>\n
The statement is a sign that BI could change its stance on
\ninterest rates. For weeks central bank officials have said that
\nit would avoid an interest rate increase as such a move would
\nslow down economic growth and increase the government's burden in
\nservicing its huge domestic debt. It insisted that the current
\nnon-interest rate measures, such as increasing the minimum
\nreserve requirement for bank, were sufficient in absorbing excess
\nliquidity in the banking sector. Excess liquidity could be used
\nto speculate against the rupiah. A weaker currency in turn could
\ntrigger inflationary pressure.<\/p>\n
BI earlier insisted that a one basis point increase in the
\ninterest rate of one-month SBI promissory notes to 7.37 percent
\nlast week should not be seen as an indication that the bank would
\nreverse its policy on interest rates. For the past two years, BI
\nhas been guiding the SBI rate downward.<\/p>\n
But some in the financial market have been speculating that
\nBank Indonesia would eventually have to increase the benchmark
\ninterest rate, particularly amid stronger inflationary pressure,
\nrising U.S. interest rates and soaring oil prices (creating
\nimported inflation). The U.S. Federal Reserve was expected to
\nraise its key interest rate again by 25 basis points to 1.5
\npercent on Tuesday (Wednesday Jakarta time).<\/p>\n
The central bank is scheduled to hold its twice-weekly SBI
\nauction next Wednesday.<\/p>\n
The rising trend in the U.S. rate has been seen as one reason
\nwhy the rupiah weakened by nearly 10 percent recently as some
\ninvestors switched from rupiah-based assets to dollar assets.
\nThe weak rupiah has also been the main factor for the higher
\ninflationary pressure. The Central Statistics Agency reported
\nthat annualized inflation in July was 7.2 percent (the highest
\nlevel in 15 months according to Bloomberg data), which is also
\nhigher than the government full-year inflation target of 6.5
\npercent.<\/p>\n
Higher inflation would further undermine the rupiah and
\nconsumer purchasing power, especially considering that domestic
\nconsumption has been the main engine of economic growth over the
\npast couple of years.<\/p>\n
Some bankers have said that an one or two percentage point
\nincrease in the SBI rate is unlikely to prompt banks to increase
\nlending rates, currently standing at 16 percent to 17 percent.
\nHigher bank lending rates would make loans more expensive for the
\ncorporate sector, which in turn would slow down economic
\nactivities.<\/p>\n
However, BI said it was optimistic that any change in policy
\nwould not harm economic growth too much, saying \"economic growth
\n(this year) is expected to reach the upper realm of the 4.5
\npercent to 5 percent target\".<\/p>",
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