BI keeps SBI rates up until after economy improves
BI keeps SBI rates up until after economy improves
JAKARTA (JP): Even as the rupiah entered its third week of a
rally, Bank Indonesia said on Tuesday that it would keep interest
rates high until after the country's economic fundamentals showed
concrete signs of improvement.
The central bank said improvements on the political front had
yet to be followed by real improvements on the economic side.
"Therefore, Bank Indonesia's board of governors is of the view
that it is too early to loosen monetary policy," the bank said in
a statement issued after a board of governors' meeting.
It said that the rupiah's upward trend was insufficient to
conclude the unit would stabilize at these new levels.
By the end of last month, the rupiah had soared by a hefty
19.9 percent, according to Bank Indonesia.
Megawati Soekarnoputri's rise to the presidency late last
month instilled further confidence in the local unit.
On Tuesday trading, the rupiah soared to a nine-month high,
closing at 9,350 against the U.S dollar compared to 9,470 the day
before.
Earlier in the day, Bank Indonesia deputy governor Miranda
Goeltom said the central bank would not respond to the stronger
rupiah with drastic rate cuts.
"Interest rates won't go down automatically," she told
reporters on the sidelines of a Bank Indonesia seminar.
According to her, it will take some time to see significant
cuts in interest rates despite an easing of pressure on the
weaker rupiah.
Inflation, although running at a worrying monthly rate of 2.12
percent in July, was also expected to drop in line with the
rupiah's recovery.
Reduced pressure on these two key indicators should eventually
allow the central bank to ease its monetary policy.
However, the promise to keep SBI rates high runs counter to
budget concerns, with a large portion of government bonds being
tied to the SBI rates.
In its first rate reduction in months, Bank Indonesia cut the
rate on its one-month SBI promissory notes to 17.15 percent last
Wednesday, down from 17.17 percent the week before.
But Bank Indonesia Governor Sjahril Sabirin said last week the
central bank would monitor the market for a couple of weeks
before seeking more rate cuts.
Strong political support for Megawati has aroused hope of a
more stable political climate paving the way to economic
recovery.
To date, even without a working Cabinet after over two weeks
in office, Megawati has kept the market banking on a stronger
rupiah.
Currency analyst at a European bank Clemento Escano attributed
the rupiah's performance to confidence in a market-friendly
Cabinet eventually emerging.
According to Escano, the three key portfolios important to
market confidence are the coordinating ministry for the economy,
the finance ministry and the attorney generalship.
The latter, he said, was vital to restoring certainty to the
country's tarnished legal system, especially the bankruptcy
court.
Escano said that at below 9,300 the dollar was too tempting to
pass by for corporations with foreign debts.
He did not rule out further gains for the rupiah, but interest
in the rupiah could wear off shortly before Megawati announces
her Cabinet. The announcement is slated for Thursday.
"There will be some short covering before the announcement,"
he said, adding that market players did not want to be caught
short in dollars.
He said that even if the rupiah did break the 9,000 level,
market players would hold the unit loosely.
"At around 8,000 the rupiah becomes vulnerable to negative
news ... people will quickly switch to dollars," he
explained.(bkm)