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.