BI interest policy ineffective: Bankers

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)