BI has no plan to cut interest rates: Sjahril

JAKARTA (JP): Despite the new-found strength of the rupiah, Bank Indonesia still has no plans for drastic interest-rate cuts until the country's base money supply drops to levels within expectations.

Bank Indonesia Governor Sjahril Sabirin said on Tuesday that inflationary pressures precluded a rapid interest rate cut, despite concerns that the bank's tight money policy was hurting investment.

"It's not the time yet to cut rates because the base money supply is still above the target we are aiming at," Sjahril said at a press briefing following a meeting of economics ministers.

The central bank is targeting a base money supply of Rp 108 trillion (about US$12.85 billion), as against the current level of over Rp 110 trillion, according to Sjahril.

He added that the achievement of the base money target was part of a deal with the International Monetary Fund (IMF).

Bank Indonesia had been justifying its high interest rates to defend the rupiah against the bullish U.S dollar.

Hiking interest rates soaks up the rupiah supply from the market to prevent it being used for speculative purposes against the national unit.

In the first six months of the year, the local unit stayed firmly above the 10,000 level, exceeding the state budget assumption of Rp 9,600 per U.S. dollar.

But the turnaround in the country's political outlook with the election of a new government has prompted hefty dollar selling.

Bank Indonesia has only recently begun to lower its interest rates in response to easing pressure from the rupiah side.

Last week's auction saw the interest rate on Bank Indonesia's one-month promissory notes down to 17.13 percent per annum from 17.15 percent the week before.

This meager cut, however, is unlikely to revive investment in the private sector, badly in need of fresh capital to raise output.

Also, last week newly installed Minister of Trade and Industry Rini M.S. Soewandi warned the rupiah's rally could hurt exports.

Sjahril too expressed caution over the rupiah's sharp gains.

"Something that rises too fast carries risks, it's best for the market to avoid them," Sjahril said.

The rupiah has risen sharply since the appointment of then vice president Megawati Soekarnoputri as President by the People's Consultative Assembly on July 23.

The rupiah rose to 10,230 against the dollar on July 23 from over Rp 11,000 the week before. The national unit continued to strengthen, breaking the 9,000 level to close at 8,605 on Monday, and further strengthening to close at 8,470 on Tuesday.

Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti said he had been taken aback by the rupiah's surge in value.

"I thought it would take another two months for the rupiah to reach the 8,000 level," he said.

Dorodjatun said a stronger rupiah would ease the burden arising from Indonesia's foreign debt repayments.

"Imagine the trillions we can save now," he said.

This year, the government has set aside almost half of its budget for servicing its debt, a large portion of which is foreign.

But Dorodjatun was quick to add that the new government must show results quickly, lest the rupiah weakened again.

Elsewhere in the money market, players continued to seek the rupiah on optimism the new government was making the right moves, dealers said.

On Tuesday trading, the rupiah was caught flirting at 8,225, before corporate dollar demand pushed the unit back to 8,470, up from 8,605 the day before.

Analysts attributed the rupiah's surge to the new government's feeding the market with the right signals.

Coined as "market friendly", the new economic team immediately pledged its commitment to secure the disbursement of the next tranche of the IMF's stalled program.

A resumption of the IMF loan program would entice foreign investors to return to the country, and flood the market with fresh dollar supplies.

The IMF's saying it would send a team to Jakarta for talks with the new government next week further bolstered sentiment. (bkm/tnt)