Thu, 31 Jul 2003

BI further cuts SBI rate

The Jakarta Post, Jakarta

In a sign of further confidence in the economy, the central bank cut its benchmark interest rate to 9.10 percent on Wednesday from 9.17 percent previously.

Bank Indonesia has cut the interest rate on one-month SBI promissory notes by more than 4 percentage points since the beginning of this year amid a benign inflation environment and stronger exchange rate of the rupiah against the U.S. dollar.

But the central bank's latest rate cut at the weekly auction of the SBI notes was made at a time of rising concern over the strength of the rupiah, which last week fell to a three-month low and forced Bank Indonesia to intervene by selling its dollar reserves. Bank Indonesia officials have remained optimistic on the prospects of the rupiah.

After appreciating more than 8 percent since early this year, the rupiah faltered last week mostly on the dollar's newly found strength, triggered by rising confidence in the U.S. economy. The sentiment forced the local unit to weaken to as low as 8,700 mid week.

On Wednesday, the local currency closed at Rp 8,510 per dollar, up from Tuesday's closing of 8,610 per dollar, a move that seems to justify the confidence shown by Bank Indonesia in simultaneously slashing its one-month interest rate.

Analysts have regarded the low Bank Indonesia interest rate as beneficial to the overall economy.

On the government side, the lower rate means lower allocation in servicing the payments for its huge public debts, as most of its interest rates are tied to the BI's rate movement. The state budget should save up to Rp 2 trillion from a 1 percent decline of the BI's rate.

The private sector should also benefit, as banks will be forced to cut their interest rates for commercial lending as well, making loans more affordable for the private sector.