BI's benchmark rate forecast to near 17 percent this week

JAKARTA (JP): Bank Indonesia deputy governor Miranda S. Goeltom said on Monday that the benchmark interest rate of Bank Indonesia's 1-month promissory note (SBI) was expected to fall by between 1 percent and 1.5 percent at Wednesday's weekly auction, to around the 17 percent level.

She also projected that the interest rate of the central bank's 3-month promissory note would drop to below 15 percent by the end of this year, from the current level of 23.33 percent

"The interest rate of the 1-month SBI should fall by 100 to 150 basis points this week," she told reporters on the sidelines of a hearing session with the House of Representatives commission VIII on the state budget and banking.

A basis point is one-hundredth of a percentage point.

Bank Indonesia has been allowing domestic interest rates to fall significantly over the past couple of months on the back of expectations of a stronger rupiah and lower inflation.

The benchmark one-month interest rate is currently 18.84 percent, compared to more than 35 percent early this year, and more than 70 percent last August.

The interest rate of the 3-month SBI has also fallen to 23.3 percent from nearly 30 percent in May.

Miranda projected that the interest rates of both the 1-month SBI and 3-month SBI would decline to below 15 percent by the end of this year.

She said that as the interest rate margin between the two types of papers decreases, the interest burden of the government bank recapitalization program could be kept at the targeted amount.

The government has issued some Rp 103.8 trillion in bonds, mostly used to recapitalize 11 private banks, with a small fraction used for recapitalizing provincial development banks.

Over Rp 95 trillion of the bonds issue carries coupon rates linked to the interest rate of the 3-month SBI. The remaining Rp 8.6 trillion worth of bonds carries fixed interest rates of 12 percent and 14 percent.

The government has allocated some Rp 34 trillion in the 1999/2000 state budget for the payment of the coupon rate. Some Rp 17 trillion is expected to come from the sale of various assets controlled by the Indonesian Bank Restructuring Agency.

Miranda said the government has injected the recapitalized banks with Rp 600 billion in coupon payments.

She said the payments were made on June 15 and June 25, adding that another payment would be due on July 25.

The real sector has urged the recapitalized banks to immediately resume lending, particularly as domestic interest rates have dropped significantly.

But Miranda said banks may not be able to immediately start lending, as they need more time to adjust to the lower interest rate environment.

She said banks have yet to resolve their problem loans.

"Banks may also think that there's still a considerable risk in lending to the real sector," she said.

However, she added that some banks had started to provide loans, although in limited amounts.

Miranda also denied the suggestion that a lower interest rate level would weaken the exchange rate of the rupiah against the U.S. dollar.

The rupiah had generally weakened last week, but the currency gained strength on Monday, closing at Rp 6,710 per dollar compared to Friday's close of Rp 6,765.

Traders said that comments from Bank Indonesia Governor Sjahril Sabirin earlier in the morning that a level of between Rp 6,000 and Rp 6,500 to the dollar remained a "good rate" had helped strengthen the currency.

"We see the rupiah equilibrium between Rp 6,000 and Rp 6,500," he told members of the House of Representatives commission VIII on state budget and banking.(rei)