Government asks BI not to push interest rate too high<\/p>\n
JAKARTA (JP): The government asked Bank Indonesia (BI) on
\nMonday not to allow domestic interest rates to soar too high
\nbecause it would be counter productive to the country's economic
\nrecovery and endanger positive development in the banking sector.<\/p>\n
Coordinating Minister for the Economy Rizal Ramli said that
\nthe central bank should not \"over tighten\" its monetary policy in
\nits effort to help stabilize the ailing rupiah because other non-
\nmonetary factors were actually more dominant in causing the
\ncurrent weakening of the rupiah.<\/p>\n
\"We asked (Bank Indonesia) not to over tighten (its monetary
\npolicy) because the fluctuation in the rupiah is largely caused
\nby non-monetary factors,\" Rizal told reporters following a
\nmeeting between Bank Indonesia board of governors and senior
\neconomic ministers including Minister of Trade and Industry Luhut
\nPanjaitan and Finance Minister Prijadi Praptosuhardjo.<\/p>\n
He said that the current political instability and currency
\nspeculation have caused the rupiah to weaken.<\/p>\n
\"Monetary solutions alone will not be effective in reducing
\nthe volatility of the exchange rate ... If the central bank rely
\ntoo much on monetary policy it would only act as a brake on
\neconomic recovery,\" he said.<\/p>\n
Bank Indonesia has said earlier that it would continue to
\ntighten its monetary policy by allowing interest rates to
\nincrease as part of efforts to help stabilize the rupiah and curb
\ninflationary pressure.<\/p>\n
The benchmark interest rate on Bank Indonesia's one-month SBI
\npromissory notes has kept soaring and reached 14.42 percent at
\nlast week's Wednesday auction.<\/p>\n
The rupiah has been hovering at around Rp 9,500 per U.S.
\ndollar lately, which is more than a 25 percent drop from the
\nlevel in January this year.<\/p>\n
Rizal said that a fair value of the rupiah should be at Rp
\n7,000-Rp 7,500 per dollar.<\/p>\n
But Rizal declined to disclose to what level the central bank
\nshould allow its benchmark interest rate to increase. Bank
\nIndonesia is an independent central bank.<\/p>\n
Rizal said that the increasing interest rates would also
\nendanger positive development in the banking sector.<\/p>\n
He pointed out that domestic banks have started to improve
\nwith better capital conditions and a lower level of non-
\nperforming loans (NPLs).<\/p>\n
The government has recently completed its bank
\nrecapitalization program boosting the bank's capital adequacy
\nratio to the minimum 4 percent level. According to the central
\nbank ruling, banks must meet the minimum 8 percent CAR level by
\nthe end of 2001.<\/p>\n
But experts have said that a continuing increase in domestic
\ninterest rates would hurt the banks and the business sector in
\ntheir bid to restructure huge amount of NPLs.<\/p>\n
Elsewhere, Rizal said that the country's economic condition
\nhas continued to improve this year.<\/p>\n
He pointed out that the economy would grow by more than 4.8
\npercent this year.<\/p>\n
He also said that the current account surplus for this year is
\nestimated to reach US$7.7 billion compared to $5.8 billion in
\n1999.<\/p>\n
He added that the balance of payments this year would top $5
\nbillion, and foreign exchange reserves at more than $29.3 billion
\nwhich was sufficient for financing more than six-months of
\nimports.<\/p>\n
Rizal admitted, however, that there was strong inflationary
\npressure this year though fortunately food inflation was negative
\nthroughout the year making inflationary pressure have less of an
\nimpact on people.<\/p>\n
He said that the high inflationary pressure was largely due to
\nimported inflation because of the weakening of the rupiah against
\nthe U.S. dollar.<\/p>\n
The domestic production system depends heavily on imported raw
\nmaterials, which creates inflationary pressure each time the
\nrupiah weakens.<\/p>\n
The government initially forecasted inflation this year to be
\nin the range of 5-7 percent, but Bank Indonesia officials said
\nrecently that inflation this year was likely to be in the range
\nof 9-10 percent.<\/p>\n
The central bank also said that inflationary pressure would
\ncontinue in 2001 with the planned increase in fuel prices and
\nhigher salary policy.<\/p>\n
Meanwhile, Bank Indonesia said in a press statement that the
\nresult of a joint meeting with the government would become an
\ninput for the central bank in designing its monetary target for
\n2001. (rei)<\/p>",
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