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)