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.