BI interest rate almost bottomed out: Economist

BI interest rate almost bottomed out: Economist

Dadan Wijaksana, The Jakarta Post, Jakarta

In contrast to what happened this year, Bank Indonesia will not
be so generous in lowering its benchmark interest rate next year,
primarily due to the prospect of strong inflationary pressure,
chief economist at state-owned Bank Mandiri Martin Panggabean has
said.

"There is not much room left for Bank Indonesia to keep
lowering its interest rate next year. The current level has
already approached the bottom," Martin said on the sidelines of a
seminar on the economy here.

The main reason behind this, according to Martin, was that
inflation would move up in accordance with an expected hike in
prices, as a result of increases in the price of electricity,
telephone calls, fuel and other items.

"All that (price hikes) would be a source for inflation,
which, I think, is standing at 9.7 percent," Martin said.

Based on that, he predicted the interest rate to hover at an
average 13.5 percent next year, not that much different from its
current level.

If this happened, it would run counter to the current trend,
which saw the central bank continually lowering the interest rate
on its one-month Bank Indonesia SBI promissory notes from the
beginning of the year.

After hovering at around 17 percent in January, the central
bank gradually reduced it to around 13 percent recently, thanks
to a stable rupiah and relatively manageable inflation.

A low interest rate is considered good for the economy as it
means less expenditure on the part of the government in servicing
its huge domestic debt, the interest rate of which is mostly tied
to movements in the SBI rate.

Also, it would push banks to lower their interest rates for
loans to a level that would eventually become more affordable for
the business sector.

That would accelerate productive activities, which would, in
turn, create speedier economic growth.

Another thing that would not help either in keeping inflation
level low, according to Martin, was the assumption that the
rupiah would not be as strong as it was this year against the
U.S. dollar.

"Our exchange rate has performed well against the dollar,
better than the (Thai) baht has against the dollar. It would be
hard to see the local unit drop below 9,000," he said.

He suggested instead the rupiah would move to around 9,500 per
dollar next year.

In the 2003 state budget, the government has assumed an
exchange rate of 9,000 against the U.S. dollar, a nine percent
inflation rate and 13 percent three-month SBI rate.