Government asks BI not to push interest rate too high

Government asks BI not to push interest rate too high

JAKARTA (JP): The government asked Bank Indonesia (BI) on
Monday not to allow domestic interest rates to soar too high
because it would be counter productive to the country's economic
recovery and endanger positive development in the banking sector.

Coordinating Minister for the Economy Rizal Ramli said that
the central bank should not "over tighten" its monetary policy in
its effort to help stabilize the ailing rupiah because other non-
monetary factors were actually more dominant in causing the
current weakening of the rupiah.

"We asked (Bank Indonesia) not to over tighten (its monetary
policy) because the fluctuation in the rupiah is largely caused
by non-monetary factors," Rizal told reporters following a
meeting between Bank Indonesia board of governors and senior
economic ministers including Minister of Trade and Industry Luhut
Panjaitan and Finance Minister Prijadi Praptosuhardjo.

He said that the current political instability and currency
speculation have caused the rupiah to weaken.

"Monetary solutions alone will not be effective in reducing
the volatility of the exchange rate ... If the central bank rely
too much on monetary policy it would only act as a brake on
economic recovery," he said.

Bank Indonesia has said earlier that it would continue to
tighten its monetary policy by allowing interest rates to
increase as part of efforts to help stabilize the rupiah and curb
inflationary pressure.

The benchmark interest rate on Bank Indonesia's one-month SBI
promissory notes has kept soaring and reached 14.42 percent at
last week's Wednesday auction.

The rupiah has been hovering at around Rp 9,500 per U.S.
dollar lately, which is more than a 25 percent drop from the
level in January this year.

Rizal said that a fair value of the rupiah should be at Rp
7,000-Rp 7,500 per dollar.

But Rizal declined to disclose to what level the central bank
should allow its benchmark interest rate to increase. Bank
Indonesia is an independent central bank.

Rizal said that the increasing interest rates would also
endanger positive development in the banking sector.

He pointed out that domestic banks have started to improve
with better capital conditions and a lower level of non-
performing loans (NPLs).

The government has recently completed its bank
recapitalization program boosting the bank's capital adequacy
ratio to the minimum 4 percent level. According to the central
bank ruling, banks must meet the minimum 8 percent CAR level by
the end of 2001.

But experts have said that a continuing increase in domestic
interest rates would hurt the banks and the business sector in
their bid to restructure huge amount of NPLs.

Elsewhere, Rizal said that the country's economic condition
has continued to improve this year.

He pointed out that the economy would grow by more than 4.8
percent this year.

He also said that the current account surplus for this year is
estimated to reach US$7.7 billion compared to $5.8 billion in
1999.

He added that the balance of payments this year would top $5
billion, and foreign exchange reserves at more than $29.3 billion
which was sufficient for financing more than six-months of
imports.

Rizal admitted, however, that there was strong inflationary
pressure this year though fortunately food inflation was negative
throughout the year making inflationary pressure have less of an
impact on people.

He said that the high inflationary pressure was largely due to
imported inflation because of the weakening of the rupiah against
the U.S. dollar.

The domestic production system depends heavily on imported raw
materials, which creates inflationary pressure each time the
rupiah weakens.

The government initially forecasted inflation this year to be
in the range of 5-7 percent, but Bank Indonesia officials said
recently that inflation this year was likely to be in the range
of 9-10 percent.

The central bank also said that inflationary pressure would
continue in 2001 with the planned increase in fuel prices and
higher salary policy.

Meanwhile, Bank Indonesia said in a press statement that the
result of a joint meeting with the government would become an
input for the central bank in designing its monetary target for
2001. (rei)