Thu, 17 Jul 2003

BI cuts interest rate to 9.21%

The Jakarta Post, Jakarta

Bank Indonesia again cut the interest rate of its one-month SBI promissory notes on Wednesday to 9.21 percent, down slightly from 9.23 percent at its previous week's auction.

Although slight, the cut should reflect the continued commitment of the central bank to maintain the downward path of its benchmark interest rate.

The central bank has been gradually lowering its benchmark rate from over 13 percent earlier this year.

Bank Indonesia Governor Burhanuddin Abdullah previously said that, provided that the inflation rate remains in check, the SBI rate could go down to around 8 percent over the remainder of this year.

The current strengthening of the rupiah against the U.S. dollar is expected to help keep inflation low.

Analysts have said the current trend was beneficial to the overall economy, as it means the government could save funds by allocating less to service its huge domestic debts.

One estimate says that a single percentage point cut from the rate could save the state coffers more than Rp 2 trillion (US$244 million).

Equally important, the trend could theoretically bring down the interest rate for bank lendings also, thus providing cheaper loans for the corporate sector to finance expansion programs.

While banks have yet to unanimously lower their lending rates, which currently stands at an average of 18 percent, they have already felt the pinch of the trend.

The hardest to be hit would be those local banks holding government bank recapitalization bonds with a floating interest rate.