BI not budging from high interest rates

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on Thursday the tight monetary policy would remain in place as uncertainty continued to put pressure on the rupiah and prodded inflation in the run-up to the June general election.

He believed the country's social and political condition, combined with the faring of the bank recapitalization program, would exert strong influence on progression of the monetary condition.

External developments, including economic occurrences in Latin America, China and Japan, would also affect the rupiah's movement.

"That is why we will continue adopting a cautious policy so as not to create volatility which can disrupt monetary stability, both on inflation and the rupiah," he told House of Representatives Commission VIII for state budget and finance at a hearing on the bank recapitalization program and monetary policy.

Sjahril said the tight monetary policy would be relaxed immediately after the rupiah regained its strength and pressure on inflation subsided.

"This is only a temporary measure. I'm optimistic that the rupiah will strengthen, which will provide more room for a lower interest rate."

The interest rate on one-month Bank Indonesia promissory notes rose from 36.97 percent to 37.15 percent at the Wednesday weekly auction.

It was the fifth consecutive increase in the benchmark rate. The rate was on a downward trend in the final quarter of 1998, from more than 70 percent in September to 35 percent in December, in accordance with the rupiah strengthening from a record low of Rp 17,000 to the U.S. dollar to around Rp 7,500 late last year.

The currency lost its footing in January, exceeding the Rp 9,000 level, following the devaluation of the Brazilian currency and poor political developments at home, as well as the public uproar over the government bank recapitalization program.

Inflation in January also surged to 2.97 percent, deviating from the downward trend during the final months of 1998.

Worries over the country's political situation heightened following recent outbreaks of rioting and unrest in several parts of the nation.

Many are questioning whether the country can have a peaceful political transition through the June 7 general election, heralded as the first open and democratic poll after more than 30 years of the authoritarian presidency of Soeharto, especially as the full impact of the 18-month-old economic crisis will be felt this year.

The rupiah closed steady at Rp 8,700 to the dollar on Thursday. (rei)