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

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.