Thu, 17 Jun 2004

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.