Central bank says plan to increase interest rates

JAKARTA (JP): Bank Indonesia (BI) said on Wednesday there was no need for the central bank to raise the domestic interest rate in the near future despite greater inflationary pressure and the looming increase in U.S. interest rates.

Bank Indonesia director for research and monetary policy Halim Alamsyah said there was actually still more room for the central bank to allow a further decline in the domestic interest rate without hurting the rupiah as long as inflation remained low.

"There's no need to raise interest rates in the near future," Halim told a monthly news conference.

Meanwhile, the benchmark interest rate of the Bank Indonesia one-month promissory note (SBI) fell to 10.97 percent on Wednesday from 11.02 percent last week.

The interest rate on the three-month SBI note also fell to 10.97 percent from 11.02 percent.

Bank Indonesia has been determined to keep interest rates low to reinvigorate the real sector from its slump and help curb the interest costs of bank recapitalization bonds.

The government has been issuing bonds to finance the country's bank recapitalization program. The 2000 state budget beginning in April allocates some Rp 37.9 trillion for bond interest payments during the forthcoming fiscal year ending in December.

Halim said the current domestic real interest rate level was still attractive to investors compared to that in neighboring countries.

He said the interest rate on three-month time deposits in Indonesia now ranged from 10 percent to 11 percent, compared to 3 percent in Malaysia in February and 6.5 percent in Thailand.

He said the domestic interest rate would still be more attractive, assuming a 2 percent depreciation rate of the rupiah, and an average interest rate of 6.5 percent overseas.

Halim, however, acknowledged that the trend of the interest rate overseas, particularly in the United States, should be watched carefully because it would have an impact on the domestic economy.

"But given our relatively high domestic interest rate, we still want a lower one," he said.

The U.S. Federal Reserves has indicated that it will soon hike its interest rates again amid persistently inflationary pressure.

Halim also said the central bank would keep its eye on domestic inflation and the exchange rate of the rupiah to the U.S. dollar in designing its interest rate policy.

He said inflation in February was low particularly due to the lower price of imported material.

Inflation in February declined 0.07 percent from its level in January, but it was a deflation of 0.84 percent if compared to the same month last year.

Halim predicted that inflation this year would be within the central bank target of between 5 percent and 7 percent after taking into account the planned increase in fuel prices and electricity rates.

He also said the exchange rate of the rupiah to the U.S. dollar was relatively stable in February although it weakened to Rp 7,400 per dollar during the last week of the month from about Rp 7,230.

Halim was optimistic that the Rp 7,000 per dollar target for the April-December 2000 fiscal year would be achievable as long as the domestic political situation remained stable.

"If inflation remains low and the rupiah is relatively stable, we will still have more room to lower the interest rate," he said.

But Halim said there was still a big question of whether domestic banks would expand their lending as interest rates move lower.

"Many banks still prefer to keep their money in SBIs," he said.

Elsewhere, Halim said the central bank expected the gross domestic product (GDP) in the first quarter of this year to grow by about 4 percent compared to the same period last year.

He added that the central bank maintained its 2000 GDP forecast at 3 percent to 4 percent. (rei)