Downward trend in interest rates likely to continue

JAKARTA (JP): Bank interest rates have declined sharply over the past two months and based on the economy's promising outlook, analysts believe the trend will continue.

Bank Indonesia's benchmark interest rate, which climbed as high as 70 percent in August last year, has gradually declined as the economy has improved over the past several months.

This week, the interest rate on Bank Indonesia's promissory notes fell to an average of 24.65 percent, compared to a 35 percent average in April.

Commercial banks have also significantly lowered the interest rates on their time deposits, following the falling interest rates at the central bank.

State Bank Pembangunan Indonesia is offering a 27 percent interest rate on one-month deposits, 25 percent on three-month deposits, 24 percent on six-month deposits, 22 percent on one- year deposits and 18 percent on two-year deposits.

Bank Internasional Indonesia offers interest rates of 26 percent, 25 percent, 24 percent and 22 percent on one-month, three-month, six-month and one-year deposits, respectively.

The interest rates offered by the banks for savings accounts are much lower, ranging from 18 percent to 20 percent.

The interest rates on one-month deposits at commercial banks were as high as 40 percent in January and 35 percent in May.

Financial analysts said interest rates would continue to fall and could reach their precrisis level of below 20 percent by the end of this year.

Rupiah stable

The analysts downplayed fears that lower interest rates would pose a threat to the rupiah, which has stabilized over the last two months.

"The rupiah will remain stable even if interest rates fell to between 17 percent and 20 percent by the end of year. There is fluctuation (of the rupiah) but it is in the normal range," financial analyst I Nyoman Moena told The Jakarta Post on Thursday.

Almost all companies now need rupiah to support their operations while bankers need rupiah for the bank recapitalization program, he said.

"They just don't have the luxury of buying dollars because of the circumstances," Nyoman said when asked if lower interest rates would encourage investors to switch their investments from rupiah to the U.S. dollar, which offers less risk.

If the general election runs smoothly and there is no unrest after the elections, the rupiah will strengthen to 6,000 against the U.S. dollar from about 8,000 at present, some analysts said.

They shared the view that political factors would influence the rupiah more than interest rates.

A monetary analyst with a foreign bank said Indonesia learned during the economic crisis that there was no meaningful correlation between interest rates and the exchange rate of the rupiah.

"The interest rate is now significantly lower than its peak at the 70 percent level in the middle of the crisis. But the rupiah's value has not significantly improved in this period," he said.

As long as interest rates do not drop below 20 percent, the impact on the rupiah will be minimal, he said.

If parties oppose the results of the general election and riots occur, it could send the wrong signal to the rupiah, the analysts said.

One analyst said that in the past the rupiah plunged immediately following riots and unrest.

However, he said the rupiah had become more riot tolerant. "The exchange rate did not react as sensitively to the last riots as it did to earlier ones."

"The smooth campaign is proof that previous riots and trouble were merely engineered by irresponsible parties," he said. (udi)