BI signals higher local rates despite Fed rate cut<\/p>\n
JAKARTA (JP): Bank Indonesia said on Friday that lowering
\nlocal rates to adjust them in line with the United States'
\nFederal Reserve Bank (Fed)'s interest rate cut was untimely, and
\nwarned that domestic rates might even rise further.<\/p>\n
Bank Indonesia Governor Sjahril Sabirin said cutting local
\nrates would not be appropriate given Indonesia's current economic
\nconditions.<\/p>\n
\"The time isn't right for us to lower interest rates, but
\nwhether they will continue to rise, we'll have to see,\" he told
\nreporters after a closed-door meeting with the House of
\nRepresentatives' budget commission.<\/p>\n
The Fed on Wednesday cut its federal funds rate -- the rate
\nused for overnight interbank loans -- by a slight 25 basis points
\nto 3.75 percent.<\/p>\n
The Fed's latest interest rate cut marked the sixth reduction
\nin its federal funds rate since early this year to help cope with
\na slowdown in the country's economy. Before the rate stood at 6.5
\npercent.<\/p>\n
A reduction in the Fed's rates often triggers central banks in
\nother countries to follow suit, particularly those whose
\ncurrencies are pegged to the U.S dollar.<\/p>\n
But in contrast, Indonesia's SBI rates have been steadily
\nrising this year.<\/p>\n
From around 14 percent early this year, the SBI (benchmark)
\nrate rose to 16.65 percent at the latest auction on Wednesday.<\/p>\n
Sjahril said earlier the tight monetary policy was necessary
\nas Indonesia's economy was different.<\/p>\n
While other countries slash interest rates to spur economic
\ngrowth, Indonesia has been increasing its rates to reduce
\npressure on the rupiah and, consequently, reduce inflationary
\npressures.<\/p>\n
But analysts are in doubt whether higher interest rates are
\nstill effective in controlling inflation and the rupiah rates.<\/p>\n
Since March, the year-on-year inflation rate has been hovering
\nat over 10 percent. The government's target is 9.3 percent.<\/p>\n
Upward pressure on inflation is likely to increase, given the
\ngovernment's move to hike fuel and electricity prices and the
\nweakening rupiah which raises the cost of imports.<\/p>\n
On the foreign exchange market, the rupiah is still performing
\nbelow the government's assumption of 9,800 against the U.S dollar
\nfor the current fiscal year.<\/p>\n
The rupiah closed at 11,410 to the dollar on Friday afternoon.<\/p>\n
Bank Indonesia's reliance on SBI rates to meet its monetary
\ntargets is also contributing to a widening state budget deficit.<\/p>\n
A large portion of bank recapitalization bonds, worth Rp 430
\ntrillion (about US$38 billion), carry interest rates tied to the
\nSBI rate.<\/p>\n
The higher the SBI rate, the more interest the government must
\npay on the bonds.<\/p>\n
Bank Indonesia Deputy Governor Miranda Goeltom said that
\ninterest rates are likely to increase, citing lingering
\nuncertainties.<\/p>\n
\"Instability and uncertainties are causing money to flow into
\nthe market. We're trying to get that money and prevent it from
\nbeing used for speculation,\" she explained.<\/p>\n
Miranda was referring to the ongoing political dispute between
\nPresident Abdurrahman Wahid and legislators, which has become a
\ncatalyst for speculative trading in the money market. (bkm)<\/p>",
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