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)