BI lowers its benchmark interest rate again

The Jakarta Post, Jakarta

Bank Indonesia lowered its benchmark interest rate again, creating concern that the move could help push inflation higher.

The interest rate on one-month Bank Indonesia SBI promissory notes slightly declined to 12.99 percent at a weekly auction on Tuesday, compared to 13.02 percent in the previous week.

The central bank said it accepted Rp 11 trillion in bids for the one-month SBI notes, or 62.9 percent of the total bids received.

Bank Indonesia usually holds the weekly auction Wednesday. But this week's auction was held a day earlier due to Christmas Day, which falls on Wednesday and is a public holiday in Indonesia.

Bank Indonesia has been guiding the benchmark rate lower since the beginning of this year, which stood at more than 17 percent, in a bid to help push economic growth and ease the burden of the state budget in covering the interest rate of huge government bonds issued to finance the cost of the late 1990s financial crisis.

The interest rate of the bonds is linked to the SBI rate.

But some analysts said earlier that at 13 percent, the SBI rate was already as low as it feasibly could go, and any move by the central bank to lower it further could put inflationary pressure on the economy.

Analysts said that inflation indices would go up in accordance with an expected hike in prices, as a result of government ordered increases in the price of electricity, telephone bills, fuel and other items in January.

With stronger inflationary pressures, the central bank must be extra careful in further lowering the benchmark rate.

A lower Bank Indonesia benchmark rate will mean banks must also lower their interest rates, thus making bank loans cheaper which would result in more spending for goods and services.

Indonesia was nearly crippled by hyperinflation during the late 1990s economic crisis. The central bank had to take emergency measures to slow inflationary pressures. The government expects inflation this year to be under 10 percent, although some think that this might not be achieved.