BI foresees further fall in interest rates
JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin predicted on Thursday a further fall in interest rates, currently running above 40 percent a year for short term deposit rates.
"The current interest rate is still high especially when compared to the recently declining inflation rate," he told reporters after a gathering at the central bank headquarters.
He declined to set any target but predicted "the rate can fall still further."
The interest rate for the one-month Bank Indonesia promissory note (SBI) was set at 35.28 percent in the weekly auction on Wednesday, a slight decline from 35.63 percent in the previous week's auction. The SBI rate exceeded 70 percent in September.
This slight interest rate decline has raised speculation that it has already reached bottom, especially after the International Monetary Fund has warned Indonesia of the danger of a drastic cut in interest rates.
Sjahril said that although the current interest rate level was already much lower than the central bank's expectation of slightly less than 40 percent by the end of this year, the rate could still go down.
Bank Indonesia director Miranda Gultom indicated recently that the interest rate could fall to around 30 percent in the first quarter of 1999.
Sjahril dismissed rumors that the central bank had been under any pressure from the IMF to decide on a certain interest rate target.
The monetary authority has embarked on a tight monetary policy to curb inflation, and strengthen and stabilize the beleaguered rupiah.
The currency has managed to do both at around Rp 7,500 to the U.S. dollar during the past couple of months, down from some Rp 17,000 in January.
The rupiah however weakened to Rp 7,900 Thursday morning.
Sjahril dismissed suggestions that this was caused by the lower interest rates, but attributed the weakening of the currency to dollar demand from people going for overseas holidays and from government usage for imports.
Asked whether the banking industry would continue to suffer a negative spread in interest rates next year, he expected the problem to considerably lessen in view of a very likely further decline in interest rates.
He added, however, that stopping the negative spread altogether would also depend on revival in the battered real sector.
The country's banking industry has been badly affected by the negative spread problem in 1998.
Negative spread occurs when the interest rates paid by a bank on time deposits are higher than the interest rates it charges on credits.
Experts see the negative spread problem continuing in 1999 and it will be a major stumbling block to the government's bank recapitalization program, as it will only eat up banks' capital.
The government has required all banks to have a minimum 4 percent capital adequacy ratio (CAR) by the end of this year. Under the government bank recapitalization program, banks with a CAR level of between less than 4 percent and minus 25 percent are eligible to government funding of up to 80 percent of the capital requirement. Bank owners have to come up with the remaining 20 percent.
Banks with CAR level of less than minus 25 percent have to inject fresh money first to fulfill the requirement for the recapitalization program.
Sjahril said that a merger with sounder banks was another alternative for these banks. Failure would mean liquidation.
Meanwhile, Bank Indonesia announced on Thursday the maximum interest rates for bank time deposits and interbank money rates that would be guaranteed by the government for the period of between Dec 28, 1998 and Jan.3, 1999. (rei)
Table: Bank Indonesia's interest rate guidelines
Time deposits Max. interest rate Max. interest rate
Rupiah deposit (%) U.S. dollar deposit (%)
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1 month 43 13
3 months 39 13
6 months 34 13
12 months 32 13
24 months 24 13
Max. interest rate for rupiah interbank money: 35%
Max. interest rate for U.S. dollar interbank money: 7%