BI keeps interest rate rule despite IMF's warning

JAKARTA (JP): The country's monetary authority will continue to allow interest rates to fall despite a warning from the International Monetary Fund (IMF).

Bank Indonesia (BI) Governor Sjahril Sabirin said on Wednesday the central bank would continue to allow interest rates to decline at a cautious pace, taking into account developments in inflation and the exchange rate of the rupiah.

"We have always lowered interest rates cautiously," he said on the sidelines of a hearing with the House of Representatives.

The interest rate on the central bank's benchmark one-month SBI promissory note fell to 35.58 percent at Wednesday's weekly auction, compared to 36.40 percent the previous week.

Sjahril said if the current macroeconomic stability persisted, there would be room for interest rates to decline by one percentage point a week.

The central bank has allowed the one-month SBI interest rate to decline since March.

BI officials have cited a more stable rupiah and a declining inflation rate as the primary reasons for allowing the lower interest rates.

The country posted 0.18 percent deflation in March, and the rupiah had been hovering at around Rp 8,500 to the US dollar over the past several weeks, compared to its lowest level of more than Rp 17,000 to the dollar in the middle of last year. The exchange rate was Rp 2,450 to the dollar before the economic crisis began in the middle of 1997.

Sjahril is optimistic inflation will continue to decline despite the upcoming June general election, which some fear could be marred by riots.

However, the IMF, which is organizing a bailout package for Indonesia, warned late Tuesday Indonesia's interest rates should remain high until there were "clear signs of improving confidence and lower inflation".

"Recent export performance has been disappointing, there has been a renewed volatility of the rupiah within a more depreciated range, inflation rose in December through February and progress in corporate restructuring has been limited," the IMF said in a statement issued after a March 25 review of the Indonesian economy.

"These developments are all a reminder of the considerable risks that could lie ahead."

The IMF has been a strong supporter of a policy of high interest rates to curb inflation and stabilize the currency exchange rate.

But the country's monetary authority has been under pressure to allow domestic interest rates to go down.

Bankers fear the current high interest rates will cause their banks' capital to continue to deteriorate due to negative interest rate spread.

The government is planning to finance the recapitalization of nine private banks through the issuance of government bonds.

BI director Subarjo Joyosumarto said last week the interest rate on the government bonds was expected to be lower than 20 percent on the back of a lower than expected inflation rate in the 1999/2000 fiscal year.

The government is assuming an inflation rate of 17 percent for the current fiscal year ending next March.

Subarjo said a lower interest rate would ease the burden on the state budget to finance the bonds' coupon rate.

The real sector also has been demanding lower interest rates because current interest rate levels are deemed inimical to sound business operations.

BI officials previously said an interest rate of close to 30 percent would be likely this year. (rei)