BI hopeful interest rate to fall below 30% soon

BI hopeful interest rate to fall below 30% soon

JAKARTA (JP): Bank Indonesia director Miranda Goeltom
expressed optimism on Friday that domestic interest rates could
fall to below 30 percent before the end of March as long as
uncertainties in the political situation and the bank
recapitalization plan could be minimized.

She pointed out that at that level the rupiah should still be
attractive compared to the U.S. dollar which offered a much lower
interest rate.

"But if uncertainty is greater, investors will demand a higher
interest rate," she told reporters.

She stressed, however, that it was not to the benefit of the
central bank to impose a high interest rate policy.

"We want a favorable interest rate level which still provides
a good yield for those keeping their cash in rupiah, but also
which makes lending and loan repayments possible," she said.

She said that an interest rate of below 30 percent could help
revive the country's beleaguered real sector and banking
industry.

The central bank benchmark one-month SBI promissory note
interest rate rose to 35.89 percent in Thursday's auction. This
is a second consecutive increase this month amid strong pressure
on the rupiah which dropped to a two-month low of Rp 9,200 per
U.S. dollar last week.

Miranda explained that the central bank had to tighten
monetary conditions to minimize the volatility in the rupiah
resulting from increasing uncertainties.

She said that in addition to last week's devaluation of the
Brazilian currency, the real, the rupiah had been dogged by the
uncertainties in the country's bank recapitalization plan and the
political situation.

The uncertainty over the government bank recapitalization plan
rose following the House of Representatives stiff opposition to
the stipulation of the costs of the program in the 1999/2000
state budget.

Worries over the political situation reemerged on news of
fresh riots in several parts of the country and the expectation
of students returning to the streets after the end of the
Ramadhan fasting month last week.

Miranda added that demand for dollars was particularly high
last week to finance the import of raw materials and food
commodities in anticipation of the Muslim Idul Fitri festivities.

"But the increase in the SBI (interest rates) is not so big...
it's a very normal thing to happen in times when our currency is
under pressure to provide a higher return on investment," she
said.

She said that a period of high uncertainty would lure
speculation in the rupiah due to the attractive yield.

"That's why we have to squeeze the liquidity to lessen
speculation," she said.

The IMF Asia Pacific director Hubert Neiss was quoted by Dow
Jones as saying on Friday that further increases in Indonesian
interest rates could not be ruled out.

Neiss told a press conference in Bangkok, where he was
attending a World Bank seminar as an observer, that higher
Indonesian interest rates were "somewhat" likely.

The benchmark SBI interest rate had declined from over 70
percent in August last year to around 35 percent early this year
on the back of a stronger rupiah.

A low interest rate is a key factor for the success of the
government's bank recapitalization measure.

A high interest rate would make the recapitalization effort
useless as the interest rate negative spread would continue to
eat up banks' capital.

Some bankers see an interest rate of around 30 percent as
still affordable to borrowers. (rei)