BI's benchmark interest rate drops to 17.15 percent

BI's benchmark interest rate drops to 17.15 percent

JAKARTA (JP): The benchmark interest rate of Bank Indonesia
one-month promissory notes (SBI) fell by over 150-basis points to
17.15 percent at the weekly Wednesday auction, from 18.84 percent
last week.

According to a central bank statement, the decline in the
benchmark rate was in line with Bank Indonesia's plans to
continue relaxing monetary conditions over the next few months,
with the hope of seeing the rate fall to below 15 percent at
year-end.

"The improving monetary condition is expected to provide
positive sentiment to the process of sustainable economic
recovery," the statement said.

Separately, Bank Indonesia Governor Syahril Sabirin said at
the House of Representatives (DPR) on Wednesday that the central
bank would allow a further drop in interest rates on the back of
expectations of low inflation and a stronger rupiah.

"We expect inflation to remain low this month," he said after
meeting with a group of legislators.

Inflation in June was negative 0.34 percent, the fourth
consecutive deflation in four months.

But President B.J. Habibie seemed impatient to see the lower
rates translated into cheaper credits to businesses.

"The President has instructed the finance minister to study
why bank lending rates remain so high," Minister of Information
Muhammad Yunus said after a limited Cabinet meeting on Wednesday.

Bank lending interest rates are currently hovering at about 30
percent.

Analysts have said domestic banks need more time to adjust
their lending rates to the current lower interest rate
environment.

They also said banks could not be expected to resume
significant lending in the near future, as banks were only now
recovering from the economic onslaught.

Syahril was confident that inflation for the whole year would
be in the single digits, lower than earlier projections of
between 10 percent to 13 percent.

He emphasized the central bank's previous tight monetary
policy, the stronger rupiah, production capacity availability,
and the smooth distribution of goods as factors that would help
push inflation down to the new target.

The International Monetary Fund (IMF) advised the central bank
last year to tighten monetary conditions in order to curb
inflation and shore up the rupiah. The benchmark interest rate
soared to more than 70 percent last August, when the economic
crisis heightened.

Although the tight monetary policy sent many companies into
bankruptcy and caused banks to suffer negative interest rate
spread, inflation fell by only 2.73 percent in the first six
months of the year.

Last year saw hyperinflation of 77.63 percent.

The rupiah also managed to strengthen to Rp 6,700 per U.S.
dollar, compared to more than Rp 14,000 last year.

Syahril said positive developments in monetary conditions,
coupled with a stable political condition, would provide a strong
basis for the country's economic recovery.

The government is projecting gross domestic product growth of
between zero percent and 2 percent this year, compared to an
economic contraction of 13.68 percent last year.

Businessmen have welcomed the declining trend in domestic
interest rates, saying they hoped banks would resume lending at
affordable rates in the near future.

But some analysts warn that a drastic decline in domestic
interest rates would harm the exchange rate of the rupiah against
the U.S. dollar, particularly in view of looming political
uncertainty in the run up to the presidential election.

The rupiah closed slightly lower on Wednesday at Rp 6,753 per
dollar, from Rp 6,712 on Tuesday, in thin trade.

Dealers said the weakening of the rupiah was not due to the
interest rate reduction, because the market often heard central
bank official pronouncements of lower interest rates.

Syahril has repeatedly said a fair market range for the rupiah
is between Rp 6,000 to Rp 6,500. (rei)