BI unlikely to lower rates in line with U.S.

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono said here yesterday that lower interest rates in the United States are not likely to affect domestic rates.

"There will be no immediate adjustment. We will have to assess our domestic economic condition before making any adjustments," Soedradjad commented last week.

The Federal Reserve last Thursday cut interest rates for the first time in three years in a dramatic policy shift away from fighting inflation and toward promoting economic growth. The Fed slashed the key federal funds rates, which commercial banks charge each other for overnight loans, from eight percent to 5.75 percent.

Soedradjad said that Indonesia, as an open economy, is generally sensitive to external monetary changes.

He said that changes in U.S. interest rates, for example, often force the central bank to change its interest rates in order to prevent the dislocation of funds.

"It doesn't mean, however, that we have to adjust ourselves to all changes overseas," he said after addressing a seminar on financial and securities markets.

Bank Indonesia, the central bank, has several times this year raised the interest rate on its Money Market Securities, the central bank's instrument to control market liquidity, to adjust to rises in U.S. interest rates.

Yesterday, the average Jakarta Inter-Bank Offered Rates (JIBOR) for overnight transactions remained stable at 14.8 percent per annum despite the drop in the U.S. rates. The average rates for JIBOR's one-month and three-month lending also stayed at last week's positions of, respectively, 17.08 percent and 17.38 percent per annum.

I Nyoman Moena, a former senior central bank official, said that it would be difficult to push down the local interest rates at present.

"The local rates will remain in their upward trend. At least, they will stay at their current levels," he said of the unusual U.S. rate cut.

He said it was not necessary at the moment to lower domestic rates because the cut in U.S. rates was insignificant. He added that domestic inflationary pressures would remain strong during the next few months.

A cut in the domestic interest rates could jeopardize the government's efforts to curb inflation, whose rate is feared to exceed the psychological level of 10 percent this current calender year, he explained.

"Inflationary pressures remain strong, so we have to maintain interest rates at a favorable level," he added. (hen)