BI interest rate slightly up for second time

BI interest rate slightly up for second time

Tony Hotland and Dadan Wijaksana, Jakarta

The interest rate on one-month Bank Indonesia SBI promissory
notes slightly increased to 7.34 percent from 7.33 percent during
its fortnightly auction on Wednesday.

But the increase, the second in as many auctions, is too small
to suggest that the central bank may start raising its benchmark
rate in the coming months, as has been suggested by some
economists to help strengthen the embattled rupiah in the face of
a possible U.S. interest rate hike.

"The increase has yet to form a sign that the SBI will be
progressively and consistency increased throughout the year,"
Fauzi Ichsan of StanChart said.

He said the increase in the SBI rate might be caused by rising
concern over soaring inflation due to the weak performance of the
rupiah against the dollar.

The central bank and the Central Statistics Agency have
acknowledged that the rupiah's shaky recent showing could lead to
higher-than-expected full-year inflation, which has been targeted
at 6.5 percent.

As for the expected increase in the U.S. benchmark rate, Fauzi
said this would not have a significant effect on the SBI rate.

The U.S. monetary authority is scheduled to meet on June 29,
and analysts are expecting an increase in its benchmark interest
rate from the current record low of 1 percent -- in line with the
recent pickup in the U.S. economy.

Top officials at the central bank, including senior deputy
governor Anwar Nasution, have said that a raise of up to 25 basis
points in the Fed fund rate could still be absorbed and therefore
a subsequent hike in the SBI rate would unlikely be necessary.

Fauzi said that even if the U.S. hike was more than 25 basis
points, Bank Indonesia could not afford to raise its interest
rate drastically due to the impact such a move would have on
economic growth.

"The market's prediction is that the raise (in the U.S. rate)
will be between 25 and 50 basis points, but I do not think it
will lead to a drastic and consistent hike in the SBI.

"Because if it does, it will hurt the country's share and bond
markets. Not to mention that it will create a greater burden on
the state budget on (domestic) debt payments," he said, referring
to the fact that most of interest rates on domestic debt payments
are tied to the movement of the SBI.

Elsewhere, Anwar told reporters the SBI rate would not surpass
the 8 percent mark this year. "I guess that's the maximum level
for our interest rate (this year)."

A higher SBI rate could encourage banks to increase their
interest rates for lending, which would make it more difficult
for the already subdued corporate sector to get loans to finance
their businesses.