Interest cut gives more room for lower SBI rates: Analys

Interest cut gives more room for lower SBI rates: Analys

Fitri Wulandari, The Jakarta Post, Jakarta

The U.S. Federal Reserve's latest interest rate cut will
provide more room for Bank Indonesia to further cut its benchmark
rate, although some doubted whether there would be any immediate
benefit to the real sector of the economy.

"It will encourage Bank Indonesia to further cut its interest
rate," Standard Chartered Bank economist Fauzi Ichsan told The
Jakarta Post on Friday.

He was commenting on the move by the Fed, which on Wednesday
cut its interest rate by a quarter-point to 1 percent, the lowest
in 45 years, in a bid to help accelerate economic recovery in the
U.S.

Bank Indonesia has been steadily cutting its benchmark
interest rate over the past year in the hope of encouraging banks
to lower their lending rates so that the corporate sector could
obtain cheaper loans. The lower rate is also expected to ease the
burden on government in servicing its huge domestic debt.

This week the interest rate on one-month Bank Indonesia SBI
promissory notes declined to 9.53 percent, the lowest since 1998
when the country became the latest victim of the regional
financial crisis. The SBI rate was hovering at more than 17
percent early last year.

But Anton Gunawan of Citibank said that the cut in the Fed
rate was only one of the factors that could affect the SBI rate.
He said that inflation was another major factor.

He explained that if inflation could be contained at around 7
percent this year, the SBI rate could go down to around 8
percent.

The annualized inflation rate in May was 6.9 percent.

Fauzi also predicted the SBI rate could come down to the 8
percent level.

Anton said that despite the fall in the SBI rate, capital
outflow was unlikely because the local interest rate was still
relatively higher than international rates, which made investing
in local assets, like bonds, stocks, and even the currency, still
attractive.

Investment in the above areas have been buoyant since early
this year. The local stock market and currency have so far been
some of the best performers in the region.

But despite the steep decline in the SBI rate, banks have
remained reluctant to lower their lending rates, keeping the cost
of borrowing expensive.

Bank Indonesia has acknowledged this fact, but said that it
could not force banks to cut their lending rates.

Boosting bank lending should help the corporate sector expand,
which would help the economy to grow at a higher rate than the
meager 3 percent to 4 percent level posted over the past couple
of years. Economic growth of around 6 percent is needed to help
the country resolve the huge unemployment problem resulting from
the economic crisis.

Meanwhile, Minister of Finance Boediono said he did not see
any immediate benefit from the Fed rate cut for the local
economy.

But he acknowledged that in the longer term, a recovery in the
U.S. economy should help boost Indonesian exports to that
country.

The U.S. is Indonesia's largest export market.

"The cut is a good thing. It will help our exports because
when the developed countries recover, it means their imports will
increase. Thus, Indonesian exports to those countries will also
rise," he said.

He said that more exports would in turn help accelerate
economic growth.

Growth -- Page 13
U.S. rebound -- Page 16