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.