BI sees further raise in SBI

BI sees further raise in SBI

Urip Hudiono, The Jakarta Post, Jakarta

Bank Indonesia (BI) will continue raising its benchmark interest
rates to help keep the country's inflation rate -- which has been
mellowing out but remains under pressure from high oil prices and
a recently weak rupiah -- on a tight leash.

"BI will still raise its interest rates, as I have repeatedly
mentioned before, because the recent inflationary situation is
still compelling us to maintain a tight-biased monetary policy,"
BI governor Burhanuddin Abdullah said on Thursday.

"Recent inflationary pressures continue to be strong, both
externally from the still soaring global oil prices, and
internally, in the recent weakening of the rupiah against the
U.S. dollar."

Global oil prices closed flat on Thursday above US$52 a barrel
following reports of declining U.S. crude oil inventories. The
local rupiah currency, meanwhile, slipped 0.3 percent to Rp 9,611
against the greenback.

BI raised on Wednesday the interest rate of its one-month SBI
promissory notes from 7.98 percent to 8.02 percent. Earlier in
the month, the central bank had also raised its three-month SBI
interest rate from 7.81 percent to 8.05 percent.

The 2005 state budget revision -- which the government and the
House of Representative's Budget Commission are nearing an
agreement on -- will likely set the average three-month SBI
interest rate throughout the year at 8 percent. The inflation
rate and rupiah exchange rate, meanwhile, are estimated to be 7.5
percent and Rp 9,300, respectively.

The Central Statistics Agency recently reported the country's
on-year inflation rate in May stood at 7.4 percent, easing out
for the second consecutive month from a high of 8.81 percent,
following the government's decision to increase domestic fuel
prices. Further inflationary pressures are however expected by
the end of the year, from the upcoming Idul Fitri, Christmas and
New Year holidays.

Burhanuddin however said the tight-biased monetary policy
would not be an absolute end, but a means to support the central
bank's more important objective of achieving an inflation rate
for the country that is more comparable with other countries' in
the region.

"If the situation requires us to be tight, then we will do
so," he said. "Otherwise, we will monitor the situation and
adjust it accordingly."

Burhanuddin said the central bank would, in the near future,
implement an "inflation targeting" scheme for the country, making
the interest rate a mid-term measurement to drive the public's
expectations of the medium and long-term inflation rate.

"If possible, we are eyeing an inflation rate of 3 percent
within the next three to five years," he said.

"This would surely be beneficially to our economy, as it would
enable us to be more competitive and attract more foreign
investments."

Rising inflation would affect the public's purchasing power,
hurting businesses and the economy alike.

Raising the central bank's benchmark interest rates to stem
inflation would however likely push banks to raise their interest
rates, making credits for business expansions more expensive, and
therefore slowing down economic growth as well.