Increase in U.S. interest rates gets mixed reactions

JAKARTA (JP): Government and private sector opinions were at opposite ends of the spectrum yesterday over the half a percentage point increase in U.S. interest rates.

"Indonesian bankers should not be worried by the move of the U.S. Federal Reserve to maintain control of inflation for sustaining its economic expansion," Bank Indonesia Governor J. Soedradjad Djiwandono told reporters yesterday after lunch with the German-Indonesian business association, Ekonid.

He said the government will wait for further developments before making any decisions. "We will not make any quick policy changes on the banking industry because the U.S. move will not seriously influence it," he said.

On Tuesday, the Fed raised its discount rate from three percent to 3.5 percent per year and the interbank federal funds rate from 3.75 percent to 4.25 percent.

Soedradjad said that some major European banks, such the German Bundesbank, even lowered their official key discount rates after the rise in U.S. interest rates.

He said Indonesia's banking industry is now experiencing ideal conditions, thanks to stable lending and deposit rates for a relatively long time.

"This situation has indeed prompted the growth of our bank credits by 20 percent in 1993, as compared to only nine percent a year earlier," he said.

According to the central bank governor, credit expansion has happened in all sectors, including for services, manufacturing, trading, agriculture and mining.

The situation also helped raise the composite index of shares prices on the Jakarta Stock Exchange to 590 at the end of last year from 274 at the end of 1992, he said.

Soedradjad said the increase in U.S. interest rates will not encourage capital outflow from Indonesia.

Affect

Prominent banking analyst Rijanto Sastroatmodjo sees the issue in a radically different light and believes the Fed's move will affect Indonesia's banking industry and money markets.

He said that the rate hike will sooner or later push up the prime rates of the Singapore interbank offered rate (Sibor) and the London interbank offered rate (Libor) and it will be imperative for Indonesian banks to adjust their rates upwards to maintain the attractiveness of rupiah deposits.

He said the central bank should initiate the adjustment by increasing interest rates on Bank Indonesia Certificates (SBI).

"Increases in interest rates are necessary to prevent capital outflows," he was quoted by Republika as saying.

Rijanto also predicted that lending rates in the country will increase in the near future.

Dandossi Matram, a spokesman for the association of Jakarta securities brokers, said that the Fed's move will hit trading activities in the country's stock markets.

"I am anxious that investors may shift their capital from the stock market to the money market," he said. (fhp)