BI urged to be cautious over rate
BI urged to be cautious over rate
Dadan Wijaksana and Rendi A. Witular, Jakarta
A gradual, limited increase in central bank interest rate remains
the best solution to strike a balance between easing pressure on
the rupiah and inflation, and keeping banks from raising their
lending rates.
A top banker and analyst told The Jakarta Post that the move
by the U.S. Federal Reserve on Wednesday to raise its benchmark
rate should not be a reason for Bank Indonesia to adopt an
aggressive rate policy, as that would harm the economy.
"Even under the current rate, demand for loans from the real
sector remains far from ideal and is way below capacity. The
prospect would be gloomier if the rate were raised," President of
Bank Negara Indonesia (BNI) Sigit Pramono said.
"A rate hike will still be tolerable as long as it is below 1
percent as we can still cope with that without having to raise
lending rates," Sigit added.
He was referring to the central bank's Tuesday announcement
that it was keeping the option of a rate hike open amid mounting
inflationary pressure. The Fed's move to lift its key rate to 1.5
percent from 1.25 percent could add to the reasons for the bank
to raise its rate.
However, Citigroup economist Anton Gunawan was of the opinion
that it was not yet necessary for Bank Indonesia to aggressively
raise its rate.
"While Citigroup is maintaining its projection that the U.S.
rate will reach 2 percent by year-end, we do not see BI as
rapidly following suit.
"Even if it had to increase the interest rate, the rise would
be slow and by a small margin," Anton said.
In its latest auction last week, Bank Indonesia raised by one
basis point its one-month interest rate to 7.37 percent from 7.36
percent. On Tuesday, it said that in order to help maintain
inflation at between 6 percent to 7 percent, the central bank
would not rule out further rate hikes in near future.
In July, based on the latest report by the Central Statistics
Agency (BPS), year-on-year inflation reached the worrying level
of 7.2 percent, higher than the government's average rate target
of 6.5 percent.
Anton predicted, however, that while the rupiah's volatility
-- partly blamed on the high level of inflation -- was likely to
remain at least until after the new government was formed, the
local currency would start to rebound ahead of year-end and
inflationary pressure would abate, he said.
"With controlled, full-year inflation, maybe at around 7
percent, the SBI will rise only to around 7.75 percent at the end
of the year," Anton said, adding that such a modest raise would
not force banks to increase their lending rate.
Chief economist of Deutsche Bank Group Norbert Walter said the
hike in the Fed's interest rates would likely push more local
firms to seek cheaper capital from the stock market, as bank
lending would eventually become more expensive.
"Financing for investment will be expensive as interest rate
increases. We expect there will be more companies selling their
shares in the stock market to obtain capital for their
operations ... . This is good for the country," he said.