Domestic interest rates must be attractive: Mar'ie

Domestic interest rates must be attractive: Mar'ie

JAKARTA (JP): Minister of Finance Mar'ie Muhammad said yesterday that domestic interest rates should be attractive enough to curb capital flight.

"Local banks have to adjust their interest rates to the rate fluctuation overseas. Otherwise, depositors will withdraw their money," the minister said in a hearing with Commission VII of the House of Representatives.

The minister acknowledged, however, that any rise in interest rates on time deposits will cause an increase in lending rates.

"It is difficult to avoid the impact of the interest rate fluctuation overseas to the country's open economy," the minister told the commission, which deals with banking, trade and cooperatives affairs.

He said that higher interest rates would have a negative impact on business activities as investors would have higher costs in their borrowing.

"That's why we are trying hard to lower the inflation rate to minimize the impact of the interest rate fluctuation overseas," the minister added.

The domestic interest rates are not officially pegged to interest rates overseas. In reality, however, any rise in interest rates introduced by the U.S. Federal Reserves would automatically affect rates of the central bank, Bank Indonesia.

The central bank recently raised the discount rates of its short-term securities by 0.25 percent in a move to curb speculation in the money market following the 0.5 percent rise in U.S. interest rates.

The discount rate on money market securities for a one-week maturity, for example, was raised to 15.25 percent per annum, for a two-week maturity to 15.50 percent and for a one-month maturity to 16 percent.

A rise of between 0.25 and 0.5 percent in the central bank's rates usually push up deposit rates offered by commercial banks by one percent.

In yesterday's hearing, the minister said that local investors still consider interest rates an important factor in investing in banks.

"If interest rates offered by local banks are too low, depositors will switch their funds to other investment means," he said.

Consequently, if banks fail to stop the flow of withdrawals, they will face difficulties as more than 90 percent of their money comes from depositors.(hen)