BI governor aims for further rate cuts

Dadan Wijaksana, The Jakarta Post, Jakarta

The Supreme Court swore in on Tuesday Burhanuddin Abdullah as the new central bank Governor, in a ceremony during which he further reiterated his pledge to maintain the current declining trend in Bank Indonesia's benchmark interest rate to help boost bank lending to the corporate sector.

"I can still see room for further cuts, hopefully it can reach a level below 10 percent," Burhanuddin told reporters on the sidelines of the ceremony.

He did not mention the time frame for the target.

Last week's central bank auction saw the benchmark interest rate fall to 10.80 from 10.91 in the previous week. The cut was the latest made by the central bank in over a year, which has seen the rate rapidly falling from around 17 percent early last year.

The move forms part of BI's commitment to help push banks to start pouring in money to the real sector to accelerate the country's economic growth.

Throughout 2002, the central bank recorded new loans expanded by banks amounting to Rp 62.5 trillion (US$7.3 billion), a slight increase compared with Rp 56 trillion handed out the year before, when the Bank Indonesia benchmark interest rate were still hovering at around 18 percent.

Currently, the average lending rate charged by banks stands at 18.8 percent.

The remarks confirm earlier commitments to legislators to boost lending.

In a presentation at the House of Representatives last week, Burhanuddin said that in the next 100 days he would focus his efforts on improving the role of the banking sector to give more financing access to the real sector, while also maintaining monetary stability.

"In my first weeks, I will immediately solicit first-hand inputs from banks as to why lending has yet to pick up despite the declining BI interest rate," he said.

He added that similar meetings would also be periodically held with other related parties, such as the government and business community, including the Indonesian Chamber of Commerce (Kadin) and trading associations.

Nevertheless, Burhanuddin said on Tuesday that such a cut should be done cautiously in order not to spark monetary instability.

"The interest rate needs to come down to a level that can spur bank lending to the business sector, but we have to do it carefully to keep inflation in check," he said.

A huge amount of lending could also mean that there would be more money in circulation, which has the potential to encourage inflation.

The inflation rate in the country -- despite being one of the highest in the region -- has been relatively low by Indonesian standards. In the first four months of the year, inflation was recorded at 0.92 percent with the on-year figure standing at 7.54 percent.

During the ceremony, Burhanuddin also said that the strong showing of the rupiah against the U.S. dollar had not come to a level that could hurt the country's exports.

"I haven't heard any complaints from exporters so far. The rupiah remains competitive compared with neighboring countries."

The rupiah has already appreciated by more than 5 percent this year alone. It ended Monday's trading at Rp 8,390 per dollar. The last time the local unit traded around this level was in August 2001.

Burhanuddin was appointed governor of the central bank for a five-year period after edging out other candidates in the running, namely Miranda C. Goeltom and Cyrillius Harinowo. He replaced Sjahril Sabirin, who had held the post since 1998.