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.