BI mulls lowering interest rates by Tantri Yuliandini

JAKARTA (JP): Bank Indonesia (BI) will allow its benchmark interest rate to decline if pressure on prices and the rupiah continue to lessen over the next couple of weeks, central bank deputy governor Miranda Goeltom said on Thursday.

Miranda said that although Bank Indonesia would retain its tight money policy for the moment it was possible that reign over the policy would be considerably lessened in the near future.

"I think if deflation is retained this September and there is no longer any persistent pressure on the rupiah, then there is every possibility to relax the monetary policy," she said on the sidelines of a hearing with the House of Representatives Commission IX for financial and development planning affairs.

Miranda said that the weakening of the rupiah over the past three days was only a "hiccup", and not a persistent threat to the exchange rate.

"Without any persistent pressure on the rupiah, of course the way toward a relaxed monetary policy will become more open," she added.

Miranda said that the bank's job was to keep the country from high inflation, which was also part of the deal with the International Monetary Fund (IMF). In the latest letter of intent, the government agreed to bring the 12-month inflation level to well within the 9 percent to 11 percent target range by the end of the year.

"But we also need to see if liquidity is a problem at this time, and we should treat that with care," she added.

Miranda said that the bank's policy to absorb only 53 percent of the bids offered for Bank Indonesia's one-month SBI promissory notes at the weekly auction on Wednesday was an indication of the bank's greater faith in the economy because it gave it greater liquidity to maneuver.

"That's the hint, that means there is a potential to lower the interest rate in the weeks to come," she said.

Miranda stressed that the downturn in the rupiah to the U.S. dollar recently was only temporary and caused by speculators spinning off rumors that Osama bin Laden, the prime suspect of the U.S. attack last week, may have been hiding in the country.

There was no rational reason for the rupiah to weaken but that of the "911" attack in the United States last week, she said, referring to the attacks which came on Sept. 11.

"The market became a bit worried, followed by those widespread rumors, which, although unbelievable, could be used to provoke the market," Miranda said, adding that as the rumor eases, the rupiah should become more stable within the next few days.

The rupiah has been under pressure over the past three days, which analysts said was due to a combination of high corporate dollar demand to repay debts and the uncertainty created by last week's terrorist attacks on the United States.

The local currency, which had enjoyed strong rates after Megawati Soekarnoputri's ascension to the presidency, had dropped to levels of Rp 9,500 this week. The rupiah had been hovering at Rp 11,000 prior to Megawati's presidency.

The dollar was quoted between Rp 9,425 and Rp 9,470 late Thursday, much lower than Rp 9,530 to Rp 9,590 late Wednesday.

The U.S. currency touched an intraday high of Rp 9,735 as local companies bought dollars to repay debts or to pay for imports.

Analysts said that the higher rupiah rate was caused by foreign players taking profits on the dollar's recent strength.

Bank Indonesia had also reportedly sold about US$10 million through brokers to help the local currency.

However, analysts said that the rupiah was also facing pressure over a possible retaliation by the United States, which could incite further unrest in Indonesia as it has the world's largest Muslim population.

Miranda reiterated earlier statements that Bank Indonesia would take steps to assure that the rupiah would not fall any further.

"We still have room to intervene, but of course I will not tell you whether we have or have not done so," she said.(tnt)