Bank Indonesia to raise interest rates

JAKARTA (JP): Bank Indonesia says it will further increase interest rates to cope with strong inflationary pressures from rising import costs and higher fuel prices imposed on major industrial users.

Bank Indonesia deputy governor Miranda Goeltom said the central bank sought proactive measures to avoid high inflation rates.

"To prevent inflation from surging, we need monetary responses now," Bank Indonesia deputy governor Miranda Goeltom told reporters on the sidelines of a seminar on Bank Indonesia's annual report for the year 2000.

But she declined to reveal by how much interest rates would be increased.

On Monday, the central bank increased its overnight certificate rates by 0.5 of a percentage basis point, to 12.125 percent.

The move was however aimed at soaking the market's rupiah supply to prevent the currency from being used for U.S. dollar purchases.

Miranda added, however, that raising interest rates was not Bank Indonesia's only policy to ease pressure on the rupiah.

She said the government's plan to hike fuel prices had already triggered a jump in the consumer price index this month.

The government decided on Monday to postpone the plan to October, except for industrial users who must bear a fuel price increase to half of the international market price.

Miranda said the steep depreciation of the rupiah had further added pressure on the inflation rate.

The depreciation of the rupiah, she said, gave rise to imported inflation, as prices of imported products rose in line with the weakening of the rupiah.

According to the Central Bureau of Statistics (BPS), the inflation rate for this month is estimated to hit one percent compared with 0.87 percent in the month before.

The central bank is forecasting this year's inflation rate to reach between 4 percent to 6 percent, not including the inflationary impact of government pricing and revenue policies.

These policies comprise among other things fuel prices, civil servant salaries and the provincial minimum labor wage.

"Government policies affecting prices and revenues are estimated to cause an additional inflation of between 2 to 2.5 percentage points," Bank Indonesia said in its annual report.

The report noted that monetary responses to curb inflation caused by non-monetary pressures might be costly.

These non-monetary pressures could be unexpected fiscal policies either from the central or regional government, a sharp depreciation of the rupiah due to non-economic factors, and security disturbances or natural disasters interrupting food distribution or production, the report said.

It then warned that applying high interest rates as a response to these non-monetary factors, might impede economic recovery.

Chairman of the Association of National Private Banks (Perbanas), Gunarni Soeworo also warned against rising interest rates too high.

According to her, Bank Indonesia's move to raise interest rates will force the banking industry to offer higher time deposit interest rates.

"Banks will consequently be vulnerable to negative spreads and erosion of capital," she warned.

A bank suffers from negative spread if the cost for paying interest rates for its depositors is higher than the revenue the bank earns from its lending rates.

Gunarni said that recapitalized banks holding government bonds with fixed rates were the most vulnerable ones to Bank Indonesia's higher interest rates.

The total assets of some recapitalized banks consist of between 40 percent to 60 percent of government bonds, quite a portion of which carries a fixed rate of 12 percent, she added.

Gunarni therefore suggested that the government exchange some of the government fixed bonds with restructured loans currently held by the Indonesian Bank Restructuring Agency (IBRA).(bkm)