Further cuts in interest rates still possible: Bank Indonesia
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.