Further cuts in interest rates still possible: Bank Indonesia

Dadan Wijaksana, The Jakarta Post, Jakarta

Defying concerns over strong inflationary pressure coming as a consequence of the recent hike in fuel and utility prices, Bank Indonesia said that chances still remained for further cuts in its benchmark interest rate.

Bank Indonesia still sees further room for domestic interest rates to fall lower this year because a stronger rupiah would help limit inflationary pressure, central bank Governor Sjahril Sabirin said in a press conference on Thursday.

He did not elaborate as to how low the rates could go, but the statement came only a day after the central bank surprisingly cut the interest rate of its one-month SBI promissory notes again, to 12.89 percent from 12.93 percent in the previous weekly auction.

This was the latest rate cut from the central bank, which has been lowering its SBI since the start of 2002, thanks to a stable rupiah and a relatively manageable inflation. Early in 2002, the interest rate was hovering at more than 17 percent.

The recent cut indicated that Bank Indonesia is little concerned about inflationary impacts from the recent price hikes.

A simultaneous increase in fuel, electricity and telephone prices at the beginning of this month had widely been expected to send the prices of goods rocketing, adding to the country's inflation.

However, Sjahril believes that inflation would remain in check, especially since the rupiah's solid performance against the U.S. dollar throughout the last year would likely continue.

"The rupiah is expected to continue rising (this year) with a trading range of between Rp 8,800 and Rp 9,200 to the dollar," he said, but added that it would not appreciate as much as it did last year.

Last year, the local currency managed to weather the myriad storms caused by both internal and external factors to appreciate almost 20 percent against the dollar.

The rupiah's performance will be influential in determining the prices of goods in the domestic market, since the country's economy has always been dependent on imported materials.

The stronger the rupiah, the lower the inflationary pressure, thereby providing room for further SBI rate cuts, Sjahril argued.

However, his statement was immediately challenged by economists who cast their doubts over the central bank's intention to keep lowering its benchmark rate.

Instead of declining, the interest rate had an ever greater prospect of going up, as the current level had already bottomed- out, said Tubagus Feridhanusetyawan, economist at the Centre for Strategic and International Studies (CSIS).

"Recent falls in the rates will likely bottom out soon. Rates will hover at a range of between 12.5 to 13 percent during the year," Tubagus said on the sidelines of a seminar.

"The rise would especially occur in the second half of this year, due to rising political uncertainties ahead of the 2004 elections. Inflationary pressures will also come with the increase of utility prices," he said.

Aside from political stability, another possible destructive force on the rupiah, Tubagus went on, would be the ongoing plans by the country to terminate the existing International Monetary Fund program. If the government fails to convince the market with a credible exit strategy, the rupiah would be badly affected.

Indonesia's relationship with the IMF is scheduled to last until the end of this year. The relationship began in 1999, with the IMF providing financial support in return for the government's commitment to economic reform programs.

A low interest rate means less expenditures on the part of the government in servicing interest payments on its huge domestic debts; these interests are closely tied to the movement of Bank Indonesia's benchmark interest rate.

What is more important, however, is that a low interest rate would enable the economy to grow faster as banks would keep their lending rates low, making loans more affordable and attractive for the business sector.