BI sees benchmark interest rate in double digit at year-end

BI sees benchmark interest rate in double digit at year-end

JAKARTA (JP): Bank Indonesia deputy governor Miranda Goeltom
said on Wednesday that the central bank's benchmark interest rate
might not be able to drop to single digit by year-end, as
suggested recently by International Monetary Fund Asia Pacific
director Hubert Neiss.

Miranda said that a benchmark rate below 10 percent could only
be achieved if inflation dropped to below 6 percent for the whole
year.

"I don't think the inflation rate could go down to below 6
percent," she told reporters on the sidelines of a gathering.

She pointed out that the economy would not enjoy deflation
throughout the rest of the year and that inflation was
traditionally high in December.

Miranda, however, estimated that inflation could be contained
between 8 percent and 10 percent this year, compared to more than
77 percent last year.

Neiss told reporters recently that the central bank's
benchmark interest rate could drop to below double digits by the
end of the year without hurting the exchange rate of the rupiah
against the U.S. dollar.

He made the estimate after approving the government's new
letter of intent to the IMF, which contains upgraded revisions in
various macroeconomic assumptions.

"If inflation continues to fall, there's no reason for the
Indonesian interest rate not to drop below the double-digit
level," he said.

A government source told The Jakarta Post recently that Neiss
was optimistic inflation could drop to below the 6 percent level
this year.

Bank Indonesia has publicly said that the benchmark interest
rate could fall to below 12 percent by the end of this year.

The benchmark interest rate of Bank Indonesia's one-month
promissory note (SBI) was at 70 percent last August when the
country's economic crisis heightened, and at more than 35 percent
at the beginning of this year.

The benchmark interest rate is now at 15.86 percent, compared
to 10.87 percent in July 1997 when the economy was about to
plunge into its worst crisis in three decades.

The central bank has allowed interest rates to drop without
hurting the exchange rate of the rupiah on the back of low
inflation expectations.

The rupiah has been hovering at around Rp 6,700 per U.S.
dollar over the past few weeks, compared to around Rp 17,000 last
year.

The lower interest rate environment is expected to encourage
domestic banks to resume lending to the real sector to kickstart
an economic recovery.

Domestic banks have almost completely halted lending to the
real sector due to the economic and banking problems.

But despite the sharp drop in the benchmark rate, lending
rates remain high at more than 32 percent, which is still
not affordable for many businesses.

"I think we still need more time for the lending rate to
further go down," Miranda said, pointing out that most time
deposits in banks were being paid relatively high interest over
the past few months.

Miranda expects banks to start lending sometime in September.

"Banks will have to lend their money otherwise they would
suffer negative spread because the deposit rate is lower than the
SBI rate."

However, she said that resuming bank lending would depend on
the speed and progress of the restructuring of non-performing
loans (NPLs).

The economic crisis has caused massive NPLs at domestic banks.
The Indonesian Bank Restructuring Agency (IBRA) plans to try to
recover some Rp 230 trillion in NPLs either through a
restructuring program or litigation process.

Domestic banks also have the responsibility to restructure a
smaller amount of NPLs and problem loans.

Miranda also said that banks would only resume lending if
there was positive economic growth.

The government and the IMF have revised upward the growth of
the gross domestic product (GDP) for the current 1999/2000 fiscal
year to between 1.5 percent and 2 percent compared to earlier
estimates of flat growth.

"But I expect banks to be careful in lending their money,"
Miranda said. (rei)