BI increases key rate by 0.25 percentage point

BI increases key rate by 0.25 percentage point

JAKARTA (JP): Bank Indonesia, the central bank, yesterday
raised the discount rates of its short-term securities by 0.25
percentage point in a fresh move to curb speculation in the money
market following the 0.5 point hike in the U.S. interest rates.

The discount rate on the money market securities for a one-
week maturity was raised to 15.25 percent, for two-week maturity
to 15.50 percent and for a one-month maturity to 16 percent.

The hike was the second after the 0.5 point increase last
month made in coping with speculative attacks on the rupiah which
were triggered by the financial crisis in Mexico.

Bank Indonesia Governor J. Soedradjad Djiwandono hinted on
Thursday that the central bank's discount rates should be
adjusted to the Fed rate.

"Such an adjustment is essential to prevent a new wave of
currency speculations," he said.

The Federal Reserve raised the short-term U.S. interest rates
Wednesday for the seventh time in a year, increasing both the
overnight interbank rate and the discount rate by half a
percentage point.

"We don't want banks raising cheaper rupiah from Bank
Indonesia to buy the dollar," Soedradjad told reporters following
the central bank's hearing with the Budgetary Commission of the
House of Representatives on Thursday.

The short-term money market securities is one of the central
bank's monetary instruments to inject additional liquidity into
the economy

Response

The rise in the securities rates received no immediate
response from commercial banks, which still maintained their
time-deposit rates at a level between 13 and 15 percent
yesterday.

Share prices on the local stock exchange also ignored the
interest rate hike, further rising on renewed activities of
foreign investors.

Securities analysts said that the rise in the interest rates
of the Fed and Bank Indonesia had a limited impact on the market
as the raise had widely been predicted.

Banking analysts said that its impact on the interest rate on
time deposit will also be minimal as the current levels are still
competitive enough to curb a capital flight.

At the hearing with the House of Representatives, Soedradjad
asked commercial banks to be more cautious in setting interest
rates as high rates that are too high could jeopardize the
economy.

He said that besides using monetary instruments, the central
bank would also continue to use moral persuasion in maintaining
the interest rates at a competitive level.

Soedradjad also told the House members that the amount of bad
loans in the country's commercial banks rose to 3.99 percent of
total credits outstanding, to a total sum of around Rp 8.65
trillion (US$4.02 billion) as of last December.

The central bank governor added that doubtful credits in the
banking sector reached 4.77 percent of total credits or around Rp
10.35 trillion, and non-performing loans 3.36 percent or around
Rp 7.29 trillion as of last December.

There are now 239 banks operating in Indonesia at present,
including seven state banks, 10 foreign banks and 29 joint
venture banks.

Soedradjad added that as of September, at least 45 banks
failed to adhere to the legal lending limits. (hen)