BI moves to control rate increases

JAKARTA (JP): Bank Indonesia (BI) decided yesterday to peg domestic time deposit interest rates to its short-term promissory note (SBI) rates in a move to control rate increases.

BI, the central bank, also announced an increase in SBI rates as well.

BI placed the ceiling for time deposit rates at 1.25 times the SBI rate, compared to the previous link to the Jakarta interbank offered rate (Jibor).

The formula for calculating the dollar deposit ceiling will remain at 1.5 times the Singapore interbank offered rate (Sibor).

BI explained that the Jibor pegging system failed to stem a recent uncontrollable increase in domestic interest rates, which would negatively affect the economy and the banking system.

"The linkage of deposit rates to SBI rates is intended to make the movement of commercial bank deposit rates more controllable," BI managing director Miranda Goeltom said.

BI acknowledged that the recent increase in deposit rates to between 25 percent and 30 percent indicated that banks were waging an interest rate war.

Rising interest rates were due to tight bank competition to lure depositors and expectations of high inflation this year, the central bank said.

BI said the government's recent policy to guarantee all bank obligations had made the risks of saving money in each bank more or less the same, and that interest rates were now the major factor in choosing banks.

"The expectation of high inflation rates this year has also induced banks to adjust their nominal interest rates to maintain positive real interest rates," Miranda pointed out.

The government announced that the monthly inflation rate for February was 12.76 percent, the highest monthly rate of the past 30 years, raising concern that the country is heading toward hyperinflation.

The central bank's SBI rate increases yesterday included a raise in the one-day SBI rate from 30 percent to 40 percent.

The rates for two days, three to six days, six months and 12 months increased to 28 percent from 26 percent, 16 percent from 14 percent, 35 percent from 30 percent, and 18 percent from 16 percent respectively.

"SBI rates will be adjusted from time to time in accordance with BI's monetary policy," Miranda said.

BI kept SBI rates the same for one week, two weeks, one month, two months and three months at 25 percent, 24 percent, 22 percent, 20 percent and 19 percent respectively.

Indonesia has been announcing reforms to carry out a massive bank industry restructuring program as part of efforts to deal with the country's economic crisis. Since last July, the rupiah has plunged in value about 70 percent against the U.S. dollar from a pre-crisis exchange rate of 2,450.

The government's decision to close down 16 private banks last November created widespread depositor panic, prompting many at the time to divert their savings to stronger banks, especially foreign and state-owned institutions.

The government move to guarantee all domestic banks from January improved confidence.

Analysts, however, have said the bank interest rate war was caused by an urgent need for banks to attract deposits due to tight liquidity and in case the government proceeded with plans to peg the currency to a foreign currency at a fixed exchange rate under the controversial currency board system.

BI also issued its bank guarantee guidelines yesterday.

The central bank held a meeting to explain the ruling to all domestic banks and said it would hold a similar meeting with foreign banks which do business with Indonesian banks. (08)