BI signals higher local rates despite Fed rate cut

BI signals higher local rates despite Fed rate cut

JAKARTA (JP): Bank Indonesia said on Friday that lowering
local rates to adjust them in line with the United States'
Federal Reserve Bank (Fed)'s interest rate cut was untimely, and
warned that domestic rates might even rise further.

Bank Indonesia Governor Sjahril Sabirin said cutting local
rates would not be appropriate given Indonesia's current economic
conditions.

"The time isn't right for us to lower interest rates, but
whether they will continue to rise, we'll have to see," he told
reporters after a closed-door meeting with the House of
Representatives' budget commission.

The Fed on Wednesday cut its federal funds rate -- the rate
used for overnight interbank loans -- by a slight 25 basis points
to 3.75 percent.

The Fed's latest interest rate cut marked the sixth reduction
in its federal funds rate since early this year to help cope with
a slowdown in the country's economy. Before the rate stood at 6.5
percent.

A reduction in the Fed's rates often triggers central banks in
other countries to follow suit, particularly those whose
currencies are pegged to the U.S dollar.

But in contrast, Indonesia's SBI rates have been steadily
rising this year.

From around 14 percent early this year, the SBI (benchmark)
rate rose to 16.65 percent at the latest auction on Wednesday.

Sjahril said earlier the tight monetary policy was necessary
as Indonesia's economy was different.

While other countries slash interest rates to spur economic
growth, Indonesia has been increasing its rates to reduce
pressure on the rupiah and, consequently, reduce inflationary
pressures.

But analysts are in doubt whether higher interest rates are
still effective in controlling inflation and the rupiah rates.

Since March, the year-on-year inflation rate has been hovering
at over 10 percent. The government's target is 9.3 percent.

Upward pressure on inflation is likely to increase, given the
government's move to hike fuel and electricity prices and the
weakening rupiah which raises the cost of imports.

On the foreign exchange market, the rupiah is still performing
below the government's assumption of 9,800 against the U.S dollar
for the current fiscal year.

The rupiah closed at 11,410 to the dollar on Friday afternoon.

Bank Indonesia's reliance on SBI rates to meet its monetary
targets is also contributing to a widening state budget deficit.

A large portion of bank recapitalization bonds, worth Rp 430
trillion (about US$38 billion), carry interest rates tied to the
SBI rate.

The higher the SBI rate, the more interest the government must
pay on the bonds.

Bank Indonesia Deputy Governor Miranda Goeltom said that
interest rates are likely to increase, citing lingering
uncertainties.

"Instability and uncertainties are causing money to flow into
the market. We're trying to get that money and prevent it from
being used for speculation," she explained.

Miranda was referring to the ongoing political dispute between
President Abdurrahman Wahid and legislators, which has become a
catalyst for speculative trading in the money market. (bkm)