BI sees interest rates still high on inflation pressure

BI sees interest rates still high on inflation pressure

Berni K. Moestafa, The Jakarta Post, Jakarta

Bank Indonesia (BI) stressed that inflationary pressure would
remain a concern for the central bank due to a weaker than
expected rupiah, dashing hopes for a cut in interest rates.

The central bank announced in its third quarter economic
report released on Thursday, that this year's inflation rate
would by likely rise above 10 percent.

"Inflationary pressure hasn't come down because of the weaker
than expected rupiah and the government's pricing policy," Bank
Indonesia said in its report.

It said that, in the short term, the central bank would focus
on guarding monetary stability, mainly due to the weaker rupiah.

"In this regard, Bank Indonesia will maintain its stance to
absorb excess liquidity from the banking system," it said.

To date, Bank Indonesia maintains interest rates at about 17.6
percent, far higher than the state budget's assumed level of 15
percent.

Keeping interest rates high helps prevent the rupiah being
used for speculation, while at the same time eases pressure on
inflation.

Spending cuts in energy subsidies, a weak rupiah and seasonal
factors lend to rising inflation, which was initially targeted at
9.3 percent.

A tight money policy, however, comes at the expense of local
industries being forced to scramble for access to cheaper funds.

It also adds to constraints on the state budget, as a large
proportion of government bonds carry rates tied to the central
bank interest rates.

Meanwhile, calls for lower rates have grown stronger as a
means of relieving local businesses from the depressed global
economy.

Fresh flows of capital should help stimulate economic growth
to offset the expected decline in export revenues.

For the third quarter, the economy grew by around 3.1 percent
to 3.6 percent, mainly on the back of consumer spending, Bank
Indonesia reported.

Consumer spending, although still positive, was lower compared
to the second quarter.

On the supply side, the third quarter economy was largely
driven by the manufacturing, trade and transportation sectors.

Turning to the fourth quarter, Bank Indonesia predicted that
the economy would face the same pressures it did in the previous
period.

Economic growth could range between 3 percent and 4 percent,
which would also reflect growth for the entire 2001 fiscal year.

"Sluggish economic growth in the fourth quarter will be
consistent with the slowdown of leading economic indicators, yet
surveys show consumer confidence for that period tends to rise
and show optimism," the central bank said.

This signals some hope for the economy, as it could bolster
domestic investment spending.

Bank Indonesia asserted that imports remaining high indicated
that investment growth would remain positive.

But it warned that persistent security threats and banks still
refraining from lending, could reverse this trend.

Bank Indonesia estimated that the average rupiah rate for this
year would range between 9,976 and 10,000 against the U.S.
dollar.