BI sees room for more interest rate cuts

Urip Hudiono The Jakarta Post Jakarta

Bank Indonesia (BI) sees the possibility of further reducing its benchmark interest rate, as inflation and the rupiah exchange rate against the U.S dollar have remained in check, a central bank official said.

"The overall state of the banking industry is also improving," BI senior deputy governor Anwar Nasution said on Thursday. "All these factors have created room for us to cut further the interest rate on Bank Indonesia SBI promissory notes."

The interest rate for one-month SBIs currently stands at 7.33 percent, after the central bank lowered it by one basis point on Wednesday, from the previous 7.34 percent. The rate hovered at around 13 percent earlier last year.

The central bank expects inflation this year to be around 5 percent.

"With the current interest rate and (this year's) inflation, the real interest rate will be about 2 percent," Anwar said. "This is still too high for the corporate sector to obtain credit for business expansion."

Anwar, however, declined to say how much the central bank was planning to lower its benchmark interest rate, although he mentioned that BI was aiming for an SBI interest rate of some 6 percent within this year, to create a lower real interest rate level of about 1 percent to 1.5 percent.

Anwar also denied that BI's plan to lower the domestic interest rate would be affected by recent pressure from the U.S. dollar on the rupiah, and the recent decision by the U.S. Federal Reserve to increase its interest rate.

The rupiah exchange rate currently stands at Rp 8,600 to Rp 8,700 per U.S. dollar.

"Many other currencies are currently under pressure from the strengthening dollar -- not just the rupiah -- but it should hopefully not have too great an effect on us," he said. "The Federal Reserve's latest decision, meanwhile, was taken to prevent the U.S. economy from overheating, and it too has little to do with us," Anwar said.

BI has over the past two years been aggressively cutting the SBI interest rate in the hope of encouraging commercial banks to lower their lending rates, thus making credit more affordable to the corporate sector.

Unfortunately, most banks remain reluctant to boost lending to the corporate sector, as investing in the sector is still deemed risky amid slow progress in corporate debt restructuring.

The banks prefer to keep their excess funds in the form of SBI notes or on the overnight money market. The market is what BI offers banks in return for depositing excess funds; it currently carries an interest rate of 7 percent.