BI plays it cool on interest rate worries

BI plays it cool on interest rate worries

The Jakarta Post, Jakarta

Bank Indonesia said on Thursday it did not intend to change its
policy on maintaining relatively low interest rates despite the
increase in the interest rates of its SBI promissory notes a day
earlier.

The benchmark interest rate on one-month SBI notes increased
by one-basis point to 7.37 percent during the regular weekly
auction on Wednesday compared to 7.36 percent the week before.
The interest rate on three-month SBI notes also rose by two basis
points to 7.31 percent.

The rate increase created speculation that the central bank
was about to change its stance on domestic interest rates amid
increasing inflationary pressure and rising interest rates in the
U.S.

But director for monetary management division at Bank
Indonesia Budi Mulya announced that a less than five-basis point
increase was normal and should reaffirm the central bank's stance
of keeping the interest rate "stable" despite the various
economic "shocks".

"We still want to absorb more liquidity from the market, but
on the other hand Bank Indonesia will try to minimize the impact
of the interest rate increase," Budi said.

He pointed out that even with a modest rate increase in the
Wednesday SBI auction, the central bank had managed to absorb
more liquidity than expected. It absorbed Rp 63.6 trillion as
compared to the target of Rp 61 trillion.

That meant, he added, that the central bank had been
successful in luring more liquidity than it wanted without it
having much of an impact on its interest rate policy.

The central bank has been guiding interest rates down over the
past two years in a bid to ease the government's burden in
servicing its huge domestic debt and spur badly needed bank
lending to the corporate sector.

But rising inflationary pressure (the annualized inflation
rate in July accelerated to 7.2 percent from the same month last
year, higher than the government's average target of 6.5
percent), the weakening rupiah and rising interest rates in the
U.S. had created speculation that Bank Indonesia had no other
choice than to adopt a higher interest rate policy soon to help
stabilize prices and defend the local unit as a further hike in
U.S. rate could trigger capital flight.

Bank Indonesia Governor Burhanuddin Abdullah has also
repeatedly said that the central bank would adopt a bias tight
monetary policy, but mainly focus on non-interest rate measures,
for now.

The measures included a higher reserves requirement for
commercial banks to absorb excess liquidity in the banking
sector, which had been blamed for the recent drop in the value of
the rupiah as excess funds had been used to speculate against the
local unit.

The central bank is also less worried about increasing
inflation, which was caused by rising oil prices and a weakening
rupiah.

According to Bank Indonesia, a 1 percent decline in the value
of the rupiah would contribute to a 0.23 percent increase in
inflation, while a US$1 per barrel increase in oil prices would
contribute to a 0.05 percent increase in inflation. The rupiah
has weakened by around 4 percent since the start of the year,
while the average oil price over the past year stands at $34 per
barrel compared to $22 per barrel assumed under the current state
budget.