BI rate hike to hamper growth

BI rate hike to hamper growth

Zakki P. Hakim and Urip Hudiono, The Jakarta Post, Jakarta

While an employers' organization welcomed Bank Indonesia's (BI)
move to increase its benchmark interest rate, which immediately
strengthened the rupiah, it also expressed fears that the move
would adversely affect the real sector and the achievement of
economic growth targets.

"Increasing the benchmark interest rate will lead to higher
lending rates, which will cause problems for the real sector,"
Indonesian Chamber of Commerce and Industry (Kadin) chairman
Mohamad S. Hidayat said.

BI raised its benchmark interest rate from 8.75 percent to 9.5
percent on Tuesday, a move that immediately bolstered the rupiah
and lifted share prices.

Hidayat said the move would increase the lending rate to 16
percent, which would in turn discourage new investment.

"As a result, everybody will wait. I hope they will not
speculate on the forex market while waiting," he said.

He stressed that if things did not improve in the next couple
of months, it would be impossible for the government to achieve
next year's growth target of 6.2 percent.

However, Standard Chartered economist Fauzi Ichsan, who has
been suggesting that the BI rate be raised to double digits to
help the rupiah, refuted the notion that the rate hike would have
adverse impacts on the country's banking industry and economic
growth.

"This is because what is needed now is a clear signal to
restore the market's trust in the rupiah, and BI has given just
that," he said. "Banks will also continue to enjoy a differential
of up to 5 percent between their lending rates and deposit
rates."

A higher central bank interest rate usually results in higher
deposit rates, which in turn leads banks to also increase their
lending rates as to maintain their profits on the differential.
Higher lending rates, however, make it more expensive for firms
to borrow in order to expand their businesses.

Fauzi warned, however, that the positive effect of the BI rate
hike might not be sustained if it was not coupled by similar
positive signals to the market from the government.

"The government must cut fuel subsidies through another
domestic fuel price hike," he said.

"They can do it gradually, like BI has done with its rate so
as not to result in counterproductive effects, such as surging
inflation."