BI sees no need for rate hike

The Jakarta Post, Jakarta

Bank Indonesia for now sees no need to raise its benchmark interest rate despite the latest increase in the key U.S. interest rate, central bank Governor Burhanuddin Abdullah said.

"So far there seems to be no impact (on the BI benchmark rate). But we'll keep monitoring it," he said on Thursday.

"(Developments in the) Fed rate will be taken into account. But it is not the only factor (affecting monetary policy)," he added.

The U.S. Federal Reserve on Tuesday raised its key short-term interest rate by a quarter percentage point to 1.75 percent, as anticipated. This is the third rate increase in the current year.

Some analysts have called on Bank Indonesia to increase the benchmark rate on one-month SBI promissory notes, both to help curb rising inflationary pressure and to maintain stability in the rupiah.

Since May, the local currency has been under renewed pressure due to a combination of political uncertainty ahead of the Sept. 20 presidential election, and rising interest rates in the U.S. which has prompted investors to switch from local assets to dollar-based assets.

Inflationary pressure has been on the rise, with annualized inflation during the past couple of months averaging about 7 percent, higher than the government's annual initial target of 6.5 percent. The rupiah weakened by nearly 10 percent earlier this month, making it as one of the worst performing currencies in the region.

Some observers have noted that Bank Indonesia is reluctant to increase interest rates because such a move would hurt the country's economy, and increase the burden on the cash-strapped government in servicing its domestic debts.

A higher interest rate environment would also have looked bad during the election period, particularly for the administration of incumbent President Megawati Soekarnoputri, who has claimed success in stabilizing the country's macroeconomy.

The central bank has lowered the interest rate on its one- month SBI notes to the current level of 7.39 percent, from about 9 percent last year. Bank Indonesia previously increased its bank reserve requirements in a bid to absorb excess liquidity, a move some central bank officials said was sufficient both to help defend the rupiah and control inflation.

Bank Indonesia senior deputy governor Miranda Goeltom was quoted earlier as saying the central bank was keeping the option open to raise interest rates, especially if there was a serious inflationary threat.

She also said any inflationary pressure during the year-end holidays should not cause concern because this pressure would be short-term in nature and would eventually ease.