BI interest policy ineffective: Bankers

JAKARTA (JP): Banking experts said yesterday Bank Indonesia (BI) should stop increasing its benchmark interest rates on short-term promissory notes (SBIs) because it had failed to shore up the rupiah's value.

Banker Bangun S. Kusmulyono and banking analyst Sutan Remy Sjahdeni suggested the central bank should instead relax its extremely tight liquidity policy to allow banks and businesses to resume their normal activities.

"Like it or not, the problems in Indonesia now are about confidence, noneconomics. If the measures are only economics, it would not be effective," said Bangun, a chairman of the Federation of Domestic Private Banks.

"However high SBI rates are increased, it would not shore up rupiah because there is already a decoupling between rupiah interest rates and the rupiah-dollar exchange rate," Remy, former director at state Bank Negara Indonesia, added.

BI has raised SBI rates three times this year. The last increase was on May 6, when BI raised SBI rates by 4 to 12 percentage points, with the highest rate at 58 percent per annum for the one-month SBI.

The last increase was made when the rupiah weakened in just two days, from under 8,000 against the U.S. dollar to almost 10,000 due to riots in Medan, North Sumatra. The currency currently trades at about 9,000.

Currency dealers and stockbrokers said the market expected Bank Indonesia would again raise SBI rates this week to support the rupiah.

Bangun and Remy shared the argument that high SBI rates would only be effective in shoring up the rupiah value and containing inflationary pressures in a normal situation where economic, social and political stability prevailed.

But in a time of economic, social and political crisis such as now, they said, the high SBI rates would merely punish both the local banking industry and businesses, most of which were currently suffering serious liquidity problems.

Bangun, also president of Bank Nusa Internasional, said Bank Indonesia should start cutting SBI rates to press down the exceedingly high costs of funds which had thrown banks and businesses into limbo.

"If SBI rates are not reduced, there will be more and more banks suffering losses," Bangun said.

Remy supported Bangun's plea, saying that high SBI rates had failed to absorb excess liquidity in the market.

Instead, it only encouraged people to transfer their funds from one bank to another, moving them from saving or checking accounts to time deposits or certificates of deposit to benefit from the higher yields.

Bank Indonesia director Miranda S. Goeltom defended the central bank's high interest rate policy, arguing that at least it limited the rupiah's drop.

Miranda told Antara yesterday that the use of SBIs had proven effective in absorbing rupiah held by foreigners overseas, which reduced pressures on the local currency.

"I see that's already good. Otherwise, the rupiah drop would be much worse," Miranda said.

She acknowledged, however, that high SBI rates alone would not make the rupiah strengthen. It would take more efforts, especially from noneconomic territories, to create peace and certainty.

Many factors had contributed to the weakening rupiah, she said. They included daily students demonstrations across the country during the past two months and social unrest in several areas.

The return of investor confidence would depend largely on how the government responded to student demonstrations, Miranda said.

"Student demands have to receive a good response, constitutionally and democratically, to quickly create a condition full of peace and certainty." (rid)