BI says recent increase in interest rate is 'temporary'

JAKARTA (JP): Bank Indonesia senior deputy governor Anwar Nasution said on Thursday that the sharp increase in its benchmark interest rate was "temporary" due to the sudden high liquidity demand in the interbank money market.

Anwar said that several banks suffered funding mismatches and had to go to the interbank money market to get liquidity, causing the interest rate to jump.

"(The interest rate) in the interbank money market now has started to go down again," he told reporters on the sidelines of a hearing between Bank Indonesian and the House Commission IX on state budget and banking.

"The funding mismatch is a normal thing, nothing to worry about," he said.

The benchmark interest rate on the one-month Bank Indonesia SBI promissory notes increased to 12.33 percent on Wednesday's auction from 11.74 percent the previous week.

The interest rate is the highest since the end of last year. The central bank has allowed the benchmark interest rate to increase for eight consecutive weeks in a bid to help defend the ailing rupiah.

But the rupiah seems not to be responding to the rate increase. The rupiah ended relatively flat on Wednesday, but closed lower at Rp 8,725 per U.S. dollar in late trading on Thursday from Rp 8,685 earlier.

The government target for the exchange rate of the rupiah this year is Rp 7,000 to the dollar.

A source at the central bank said that Bank Indonesia had to allow the SBI interest rate to rise at the Wednesday auction because the regular buyers of its notes had shifted their funds to the money market.

The source confirmed that several banks suffered funding mismatches and had to borrow money from the interbank money market.

Meanwhile, Bank Indonesia deputy governor Dono Iskandar told legislators that every one percent increase in the SBI interest rate would cost the central bank some Rp 1 trillion (US$115.47 million) per year.

"It's costly. And it (interest rate increase) doesn't only create a burden to Bank Indonesia but also to the government which has to pay interest for the bank recapitalization bonds," he said.

However, he said Bank Indonesia is still making money by selling its dollars at the current higher exchange rate.

He expects the SBI rate to go down to less than 12 percent by the end of the year assuming that the country's social and political problems subside.

Dono explained that the central bank's direct market intervention as well as an increase in SBI rate would not ensure a stronger rupiah because other non-economic factors including political problems also affect the currency.

He said that the current weakening of the rupiah against the U.S. dollar was largely caused by non-economic factors.

Looking ahead, the plans to create a secondary market for government bonds would help reduce the cost of Bank Indonesia's market operation.

He said that if the secondary market had been running well, Bank Indonesia would drop its SBI instrument and replace it with government bonds.

"We could affect the currency in circulation by buying or selling the bonds," he said.

Asked when the replacement would take place, he said that it's too soon to predict. "Maybe 2002 or 2003 or even later."

He said that the government bond secondary market was expected to start functioning this year after the infrastructure has been completed.

The government has issued more than Rp 321 trillion worth of bonds to help finance the recapitalization program. And expects to issue more bonds worth another Rp 105 trillion.(rei)