BI says interest rate still attractive

BI says interest rate still attractive

The Jakarta Post, Jakarta

Bank Indonesia deputy governor Aslim Tadjudin said on Tuesday
that interest rate levels in Indonesia were still attractive to
foreign investors as evidenced by a rising short-term capital
inflow into the country.

He pointed out that there was a huge amount of foreign funds
invested in Bank Indonesia SBI promissory notes, about Rp 7.2
trillion (US$780.06 million), and around Rp 7 trillion of
investment in government bonds.

He added that there had also been a lot of overseas money
entering the local stock market, but did not provide any figures.

"This is because the yield on the rupiah is still very
profitable to foreign investors," Aslim was quoted by detik.com.

His statement came amid calls from many in the financial
sector for Bank Indonesia to start increasing interest rates to
help defend the ailing rupiah and curb inflationary pressure,
particularly after the recent 25 basis points increase in U.S.
benchmark interest rate to 1.75 percent.

The central bank is scheduled to hold a bi-weekly auction for
the SBI notes on Wednesday. Judging from Aslim's statement, the
auction may result in a relatively stable interest rate.

For the past couple of years, Bank Indonesia has been working
hard to guide down its benchmark interest rate, down to around
7.39 percent now, in a bid to encourage banks to lend more money
to the corporate sector as well as ease the government's burden
in servicing its huge domestic debts.

Many in the financial market have suggested Bank Indonesia
should start raising its interest rate as the margin between the
current domestic rate and the U.S. rate has been narrowing, which
would make rupiah-denominated assets less attractive, and could
trigger investors to switch to dollar-based assets.

But Aslim argued that there was still a significant
differential between the local rate and the U.S. rate, pointing
out on the benchmark SBI rate of around 7 percent compared to the
U.S. benchmark rate of 1.75 percent.

He also said that the current interest rate level would
provide a conducive environment to push economic growth higher at
an average of 7 percent per year during the next five years.

"Let's hope that with new government and a market-friendly
Cabinet lineup, the country can have a better economic
environment," Aslim said.

Analysts, however, insisted that with annual inflation around
7 percent and the rupiah's depreciation, the current domestic
interest rate would make investment in rupiah assets less
attractive.

Indeed, the rupiah has been under pressure lately, with the
local unit weakened to Rp 9,230 per U.S. dollar on Tuesday from
Rp 9,180 on Monday.