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)