BI cuts rates further as rupiah and stocks stable

JAKARTA (JP): Bank Indonesia, the central bank, cut interest rates again yesterday on its short-term papers (SBIs) by 100 to 200 basis points to drive down high interest rates in the banking system.

The central bank's move, however, did not influence stock and currency markets as they were prepared for such a cut, bank dealers and stock analysts said.

Minister of Finance Mar'ie Muhammad said the government would follow up the interest rate cut with another to reduce interest rates in the banking system to a healthy level.

"This cut is a signal to the currency market about the direction we are going to pursue," Mar'ie said at a hearing with the House of Representatives Budgetary Commission.

Bank Indonesia yesterday cut rates for one-week and two-week SBIs by one percentage point each to 19 percent and 21 percent respectively.

Interest rates for one-month and three-month SBIs were cut by two percentage points each to 25 percent and 23 percent respectively.

Bank Indonesia in August doubled short-term rates for its papers, with one-month SBI rates jumping to 30 percent, to slow the rupiah's decline against the U.S. dollar following the floating of the rupiah.

Last week, the central bank cut one-month and three-month SBI rates by 300 basis points to 27 percent and 25 percent respectively.

The rupiah has slipped by 20 percent against the greenback in the last two months, following offshore attacks on the currency and a rush by local companies to hedge foreign borrowings.

Despite the central bank's interest cut, the rupiah remained stable against the dollar in sleepy late trading yesterday, foreign exchange dealers said.

Spot rupiah, which opened at 2,890/2,900, slipped briefly to a low of 2,915 after the rates cut but quickly strengthened again to close at 2,880/2,895.

Yield for three-month swaps was already at 18 percent, far below the central bank benchmark rates of 23 percent, suggesting the market had anticipated the move.

They said the interbank market was also slightly affected by the cut because of sustained high rupiah demand. Overnight money was at 30 percent. One-week to three-month rates were at about 30 percent.

One local bank chief dealer said that despite cuts, SBI remained attractive for foreign investors and they continued to look for placements of their funds in SBIs.

He said BI would cut further its short-term SBI rates to reduce interest payment burden on the increasing short-term foreign funds placed in SBIs.

The rates cut, however, failed to boost sentiment in the Jakarta Stock Exchange, stockbrokers said.

Share prices on the exchange closed 0.4 percent lower in volatile trade as mixed reactions greeted the central bank's move to further cut rates.

The Jakarta Stock Exchange composite index closed down 2.307 points at 598.004. Turnover totaled 586 million shares valued at 732.8 billion rupiah (Rp 253.1 million).

An analyst with Lippo Securities, Martin PH Panggabean, said long-term investors had not yet returned to the stock market as they preferred investing in fixed income instruments to stocks.

"This is not a market for long-term investment. This is a market for traders who have suffered losses and tried to recover the losses by doing intraday trading," Martin said.

He said the market would continue to be volatile as long-term investors had not yet returned to the market. (rid)