BI anticipates further drop in interest rates

JAKARTA (JP): Newly appointed Bank Indonesia deputy governor Miranda S. Goeltom anticipates a further decline in domestic interest rates on the back of expectations of lower inflation and a stronger rupiah.

She predicted that Wednesday's auction of Bank Indonesia one- month SBI promissory note would result in a decline of the benchmark interest rate of between 1 to 2 percentage points to around 27 percent, from the current level of 29.99 percent.

"Tomorrow the interest rate (on the one-month SBI) could go down by between 100 and 200 basis points to around 27 percent. This is my hunch," she said on Tuesday.

Miranda said lower interest rates would be helpful in efforts to recapitalize the ailing banking sector and rebuild the battered real sector.

"A low interest rate environment will also boost confidence as people will perceive that an economic recovery is imminent."

BI has been allowing the benchmark interest rate to decrease steadily over the past couple of months from over 36 percent in March. The interest rate was as high as 70 percent last year when the economic crisis heightened.

Several major domestic banks have also continued to lower interest rates on their time deposits. Bank Bali is now offering a 26.5 percent interest rate for its one-month rupiah time deposit, compared to last week's 28 percent. Interest rates for its 3-month, 6-month and 12-month deposits were also lowered respectively to 25 percent, 23 percent and 21 percent, compared to previous levels of 27 percent, 25 percent and 24 percent.

Other banks, including Bank Panin and Bank NISP, have also cut their interest rate levels. Bank Panin is now offering a 24 percent interest rate for its one-month deposit and 19 percent for its 12-month deposit. Bank NISP offers 26 percent for a one- month deposit and 20 percent for a 12-month deposit.

Several senior government officials have expressed optimism that domestic interest rates will drop to as low as 20 percent by the end of this year.

The declining trend in interest rates, however, did not cause a drop in the exchange rate of the rupiah against the U.S. dollar. The local currency has managed to stabilize at around Rp 8,000 to the dollar.

Inflation

Miranda attributed the stability to expectations of lower inflation.

She said inflation could be maintained at its current level because the central bank had been able to control the money supply, and concerns over the availability and supply of basic commodities had subsided.

Indonesia posted negative inflation in both March and April, amounting respectively to 0.18 percent and 0.68 percent.

"Based on our calculations, the rupiah won't weaken even if we further cut the interest rate," she said.

Miranda said people were expecting the rupiah to continue to recover.

"The probability is quite strong for the rupiah to further appreciate. There are many indicators to support this trend."

She pointed out that the dollar-rupiah swap margin for the next three months had declined.

"The Indonesia-Singapore offshore rate has also continued to decline, indicating that people are expecting the rupiah to improve."

She said a bullish local stock market, together with an inflow of foreign funds, and plans by foreign joint-venture banks to start recapitalizing their local operations were positive indicators for the rupiah.

"But we still have to be cautious because there are other factors which can affect the rupiah. We must not be careless," she said, pointing to the upcoming June general election and other external factors.

However, she expected that election jitters would not trigger a massive run on the dollar because of perceived gains in holding the rupiah.

President B.J. Habibie officially put into force the new central bank law on Monday and reappointed Bank Indonesia's board of directors to the newly created board of governors.

The new central bank law allows BI to decide monetary policy.

Miranda said the central bank would now have a single focus to control prices in its monetary policy.

She said that in the past BI was assigned multiple tasks, including managing the rupiah and maintaining low interest rates.

"This was impossible," she said. (rei)