Further interest rate cuts still possible this year: BI

Further interest rate cuts still possible this year: BI

The Jakarta Post, Jakarta

Bank Indonesia Governor Sjahril Sabirin said there was still
more room for the central bank to continue to lower its benchmark
interest rate this year.

He said that the lower interest rate environment could be made
possible amid expectations of slower inflation.

"Given the good prospects of the rupiah and inflation, we
still see the opportunity to bring the (benchmark) interest rate
down even lower," Sjahril told legislators during a hearing with
the House of Representatives Commission IX on financial affairs
on Wednesday.

The interest rate on Bank Indonesia one-month SBI promissory
notes slightly declined to 12.65 percent at Wednesday's weekly
auction, compared to 12.77 percent the week before.

The central bank has been guiding its benchmark rate lower for
the past year. In early 2002, the interest rate hovered at more
than 17 percent.

But Sjahril was quick to add that the rate of decline in the
benchmark rate would not be as big as last year's.

The lower benchmark rate would not only help reduce the burden
on the state budget in covering the interest on the massive
government bonds issued to help bail out banks in the late 1990s,
but would also help make bank lending more affordable to the
business sector.

Sjahril said that the central bank was expecting a lower
inflation rate this year particularly as the rupiah was expected
to become stronger.

After deservedly being labeled the region's best currency
performer last year, the rupiah's strong hold on the U.S. dollar
was expected to continue this year, Sjahril predicted, although
it would not appreciate as much as it did in 2002.

"The local unit is expected to strengthen as dollar supply
would exceed demand this year. It would hover at between Rp 8,800
and Rp 9,200 on average," he said.

Last year saw the rupiah appreciate by more than 10 percent,
averaging at Rp 9,316 as compared to 2001, which averaged at Rp
10,225 against the dollar.

The supply would mostly come from export revenue; inflow of
foreign capital -- in the form of foreign loans or investments;
the sale of assets under the Indonesian Bank Restructuring Agency
(IBRA) privatization and divestment program.

On the other hand, the restructuring of foreign debts by the
private sector, both via the Jakarta Initiative Task Force (JITF)
and independently, would help reduce dollar demand from the
corporate sector.

Bank Indonesia was convinced that the above factors would be
able to offset the pressure on the rupiah, arising from the
expected rising political tension ahead of the 2004 election
starting in the second half of the year.

Since the economy has a high dependence on imported material,
a strong rupiah would be influential in keeping the prices of
goods in the domestic market low, giving only little inflationary
pressure.

BI predicted that the main source of inflation would center on
the impact from the government's policy on utility prices.

The impact of the policy on the prices would contribute 3.0
percent to overall inflation this year, which is lower than last
year's, where the prices made up around 3.3 percent of the full
year's inflation.

"Underpinning such arguments, Bank Indonesia has set inflation
for 2003 at 9 percent, with a deviation of -1 percent to 1
percent," Sjahril said.

The target is the same as what had been agreed to in the 2003
state budget.

Elsewhere, Bank Indonesia reported that new bank lending in
2002 reached Rp 72.17 trillion, or higher than Rp 56.8 trillion
in 2001.

The central bank said that total outstanding bank loans were
around Rp 363.9 trillion.

Sjahril said that some 41 percent of the new bank lending was
in the form of micro credit with individual loans amounting to
less than Rp 5 billion. This was mostly given to small and
medium-sized companies.