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.

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