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.