Fri, 06 Jun 2003

Bank Indonesia further cuts intervention rate to 10.25%

The Jakarta Post, Jakarta

Bank Indonesia cut its overnight money market intervention rate by 25-basis points to 10.25 percent on Thursday, in a sign that the central bank will continue to loosen monetary policy amid the current low inflationary environment.

The cut in the intervention rate, which is the interest rate Bank Indonesia pays commercial banks for deposits, is the sixth this year.

The move follows a decline in the interest rate on one-month Bank Indonesia SBI promissory notes on Wednesday to 10.27 percent from 10.44 percent. The central bank has been guiding the benchmark rate lower from around 17 percent early last year, a move made possible by relatively weak inflationary pressures.

Bank Indonesia Governor Burhanuddin Abdullah said during a hearing with the House of Representatives Commission IX on financial affairs on Thursday that there was still room for a further decline in the benchmark rate.

He said that the lower rate should help increase bank lending to the corporate sector as borrowing would become cheaper. This in turn would be good for economic growth.

He added that the lower SBI rate would also help ease the burden on the government in servicing its huge domestic debts.

Elsewhere, Burhanuddin explained that the current benign inflation environment was partly due to a stronger exchange rate for the rupiah against the U.S. dollar, which makes imported goods cheaper.

The rupiah has appreciated by around 10 percent since the beginning of this year, prompting fears that the rapid appreciation could hurt the performance of the country's exporters.

While acknowledging this possibility, Burhanuddin stressed that the rupiah's appreciation would benefit the overall economy as it would ease the burden on local companies in servicing their overseas debts, and allow local manufacturing companies to avail of cheaper imported raw materials.

The country's production system is heavily dependent on imported raw materials.

"It (the rupiah's appreciation) will be beneficial for the overall economy," Burhanuddin said.