BI maintains rate despite U.S. Fed's increase

Tony Hotland, Jakarta

Bank Indonesia (BI) Governor Burhanuddin Abdullah said on Thursday the central bank would not raise interest rates despite the U.S. Federal Reserve's decision to increase its benchmark rate.

"Market players here anticipated the increase, even higher than 25 basis points, and they factored in the increase in their business decisions and calculations," he said.

The U.S. Fed raised on Wednesday its benchmark rate, which had been at a 46-year low of 1 percent, by a quarter point to 1.25 percent. The decision was taken in response to climbing consumer prices.

Burhanuddin said the tight monetary policy currently adopted by the bank was sufficient to compensate for the effect of the U.S. increase.

"We have been practicing a tighter monetary policy, such as raising the deposit reserve level and absorbing excess liquidity as much as possible through the SBI promissory note auctions, and we will focus on this for now," he said.

The interest rate on the one-month Bank Indonesia SBI promissory note stands at 7.34 percent, up slightly from 7.33 percent at the last auction.

Many economists have suggested the central bank should increase the interest rate to help strengthen the embattled rupiah.

A higher SBI rate would 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.

Asked how long the BI would maintain its tight monetary policy, Burhanuddin said it was difficult to set a time frame given the volatility of the situation.

Indonesian stocks and the rupiah dropped significantly in the weeks after the U.S. Federal Reserve hinted at a rate hike last month. But on Thursday, the rupiah rose more than 1 percent against the dollar to 9,305 from 9,405 the previous day, while the local stock index closed marginally lower at 729.808 from 732.401.

Burhanuddin said despite recent drops in the rupiah's value, the macroeconomic assumptions were still within target, including the inflation target of between 5.5 percent and 6.5 percent.

"The rupiah has been stronger and global oil prices are declining as well," he said.

Also on Thursday, BI and the Ministry of Finance established a team to assist both institutions in determining, monitoring and controlling the inflation target in order to reduce the uncertainty for market players.

With assistance from this team, the government is expected to announce its inflation targets for the years 2005, 2006 and 2007 by the end of July at the latest.

"The team will conduct studies to help determine the inflation targets. Then it will monitor inflation and also provide input or early warnings should inflation not move in the expected direction," Burhanuddin said.

The formation of the team is in line with Law No. 3/2004 on BI, which stipulates that inflation targets will be set by the government after consulting with the central bank.

"The team will also make sure that both institutions do their best to keep the inflation targets on track, since the targets affect decisions and calculations made by market players. Our credibility is involved here," finance minister Boediono said.