Analysts don't expect big hike in interest rates

Analysts don't expect big hike in interest rates

JAKARTA (JP): Experts expect the current increasing trend in
domestic interest rates aimed at providing support for the
beleaguered rupiah will only be limited and temporary.

Senior banker I Nyoman Moena said on Saturday that the
effectiveness of using monetary instruments to restrain the
decline of the rupiah against the U.S. dollar would be minor
because the main pressure for the currency was no longer economic
factors but concern over the country's political situation.

"Raising interest rates and market intervention will no longer
be effective in influencing the rupiah's exchange rate because
the pressure on the rupiah is not coming from economic factors
but from the people's perception that things will get worse as
the general election approaches," he said.

"So the increase in interest rates will be very limited," he
added.

Bank Indonesia's benchmark one-month promissory note (SBI)
interest rate rose to 35.89 percent in last week's auction. This
is the second consecutive increase this month amid strong
pressure on the rupiah, which dropped to a two-month low of Rp
9,200 to the dollar on January 13.

The local unit closed at Rp 8,925 to the dollar on Friday.

IMF Asia Pacific's director Hubert Neiss said on Friday that
further increases in Indonesian interest rates could not be ruled
out in the wake of the plunging rupiah.

The currency tumbled on various factors, particularly the
contagion effect from the devaluation of Brazil's real, fresh
riots in several parts of the country and expectation of students
returning to the street this week.

The rupiah managed to hover at between Rp 7,500 and Rp 8,000
during the last couple of months of last year, which was a
significant improvement on a more than Rp 15,000 in June and
July.

The stabilizing currency had provided the central bank with
more room to allow the SBI interest rate to fall to 35 percent
early this year, compared to more than 70 percent in August last
year.

Bank Indonesia's director Miranda Goeltom admitted on Friday
that the central bank had to tightened monetary conditions to
minimize the volatility in the rupiah resulting from increasing
uncertainties.

"But the increase in the SBI (interest rates) is not so big.
It's a very normal thing to happen in times when our currency is
under pressure to provide a higher return on investment," she
said.

She did stress, however, that domestic interest rates could
fall to below 30 percent before the end of March as long as
uncertainties in the political situation and the bank
recapitalization plan can be minimized.

She said that it was not to the benefit of the central bank to
impose a high interest rate policy.

Pande Raja Silalahi, an economist at the Center for Strategic
and International Studies, said the decision by the central bank
to allow the SBI interest rates to move higher would only be a
temporary measure to reduce the volatility in the rupiah.

"I think the monetary authority will remain with its
commitment to continue reducing domestic interest rates," he
said.

He also agreed with Moena's view that if the pressure on the
rupiah was coming from political worries and a lack of confidence
in the current transitional government, employing a high interest
rate policy would not be effective in defending the battered
currency.

"The confidence problem should be solved first," he said.

A "favorable" interest rate level is seen as a key to solving
the country's battered real sector and banking industry.

The government started employing a tight monetary policy last
year, as prescribed by the IMF, to curb inflation and stabilize
the currency.

The high interest rate policy received widespread criticism as
it had dragged the country -- and other IMF patients Thailand and
South Korea -- into a deeper recession.

The IMF last week admitted it had made some mistakes in
handling the Asian crisis, but maintained that its tight monetary
policy was the right prescription. (rei)