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)