BI cuts interest rate to a new historic low 8.06%

BI cuts interest rate to a new historic low 8.06%

Dadan Wijaksana, The Jakarta Post, Jakarta

Bank Indonesia cut its benchmark interest rate to 8.06 percent
during the weekly auction of its SBI promissory notes on
Wednesday, from an already all-time low of 8.24 percent last
week, defying analysts expectation that the rate's declining
trend would soon come to a halt.

The rate cut, indicates the central bank's determination to
cautiously maintain the two-year declining trend in the interest
rate.

The move should provide more leeway for the banking sector to
follow suit, by lowering rates for lending to the corporate
sector and make it more affordable for businesses. Theoretically,
this would spur productive activities in the corporate sector and
thus accelerate economic growth.

Bank Indonesia has attributed the rate decline to the stable
rupiah and easing inflation. Throughout 2003, the rupiah
strengthened at an average of Rp 8,577 per dollar while annual
inflation eased at 5.06 percent -- the lowest in the past four
years.

But, with the general election looming, many are doubtful over
the continuity of such a declining trend in the interest rate,
including Bank Mandiri.

In its economic outlook report issued on Wednesday, the
country's largest bank expected the one-month SBI rate to go up
this year, as the general election would likely create pressure
on the rupiah and ignite inflation.

The benchmark rate might start rising in March or May, all the
way until the end of the year, at a range of 8.9-9.5 percent, the
bank's chief economist Martin Panggabean said.

"This is based on the assumption that the rupiah will hover at
an average of 8,800 (per dollar) and (annual) inflation at 6.8
percent," Martin said.

Both are higher than targeted in the 2004 state budget. While
the rupiah's average is predicted at 8,600 against the U.S.
dollar, inflation is set at 6.5 percent.

Martin said that during the elections period, the political
atmosphere would heat up.

Although investors would not necessarily dump the rupiah, most
would apply a "wait and see" attitude, which eventually would
hamper the performance of the local unit, which was one of best
performing currencies in Asia last year.

A weaker rupiah would put upward pressure on the prices of
imported goods.

Meanwhile, trillions of rupiah provided by 24 parties to
support their campaign activities would increase money in
circulation -- both serve as major inflationary pressure.

The reverse in the current declining trend of the Bank
Indonesia rate, would consequently make it harder for the banking
sector to boost its lending portfolio to the corporate sector, as
banks would very likely up their lending rates as well.

Even last year, when the benchmark rate from Bank Indonesia
was sharply slashed, banks remained reluctant to lower their
lending rates to the private sector.

Against this background, while private investment remained
scarce, Martin expected the economy this year would expand by
only 4.3 percent, lower than the government's target of 4.8
percent.

"That's an optimistic prediction. The worst scenario is that
the economy would grow by 4.1 percent," he added.