Domestic rates to remain high

Domestic rates to remain high

JAKARTA (JP): The drop of interest rates in the United States will not affect interest rates at home, according to analysts.

The analysts said recently that interest rates in Indonesia will remain high as banks will continue to compete to raise funds in the tight market.

"The drop is too small to affect domestic rates. Besides, it will be difficult for banks to lower rates while they still need a lot of funds to finance loans," an analyst said about the impact of the drop in U.S. interest rates.

The U.S. Federal Reserve cut two key short-term interest rates by a quarter of a point Wednesday in a move to stimulate the sluggish economy. The Fed Open Market Committee cut its interbank federal funds rate to 5.25 percent and its discount rate to 5 percent.

Marjanto Danoesapoetra, one of the analysts, said that the strong demand for loans is the main reason why it is difficult for Indonesian banks to lower interest rates.

The central bank's policy to limit the growth of the money supply and loans at 19 percent respectively, in addition to its recent decision requiring banks to raise their minimum reserves to 3 percent of their assets from the previous 2 percent, would make the monetary condition at home even tighter than the previous year's.

"It indicates that the pressure for high interest rates will remain strong," he said. Another factor which could push up domestic interest rates further is the continuous increase of demand for credit, he added.

Jonki Kresnadi, the head of the corporate affairs of Bank Niaga, said that the central bank's decision to raise the reserve requirement to 3 percent would result in an immediate increase in the costs of money in the banking industry.

In addition, the increase in the reserve requirement would reduce the money supply, thereby putting further pressure on the upward trends of interest rates on time deposits and other savings, he said.

Jonki said that commercial banks will, in return, raise their lending rates to offset their higher costs of funds.

He said interest rates on time deposits will remain high at a range between 16 percent and 17 percent per annum, while lending rates will hover at about 20 percent to 22 percent per annum. (hen)