Interest rate could drop to 7.5%

Interest rate could drop to 7.5%

The Jakarta Post, Jakarta

Standard Chartered Bank has forecast the declining trend in Bank
Indonesia's interest rate will continue, and by year-end the rate
will be between 7.5 percent and 8 percent.

Standard Chartered global economist Fauzi Ichsan said on
Tuesday a combination of internal and external factors were
behind the continued decline, which bodes well for efforts to cut
bank rates for commercial lending.

"First, inflation is expected to continue to ease, mainly
because of a stable rupiah. We predict inflation will reach about
6 percent by the end of the year," Fauzi said.

The Central Statistics Agency recently reported that
inflationary pressure had eased over the past several months due
to stable or declining prices of consumer goods. In July,
inflation stood at 0.03 percent, bringing the cumulative figure
for the first seven months of the year to 1.26 percent, a
historic low.

Currently, the interest rate on the Bank Indonesia promissory
note stands at 8.99 percent, far below the 13 percent level of
earlier this year. The central bank expects the rate to hover at
about 8 percent to 9 percent this year.

Fauzi said the central bank would continue to cut rates to
ease its burden. He said a high rate would be burdensome because
the excess liquidity in the banking sector was channeled to the
bank's promissory notes. BI has to pay interest on the excess
liquidity.

"On a daily basis, the excess liquidity is estimated at
between Rp 15 and Rp 20 trillion," he said.

Analysts have said the excess liquidity comes as a result of
the reluctance of domestic banks to channel loans to the
corporate sector, which is still deemed as risky because of the
slow recovery of the country's economy.

Externally, Fauzi sees little chance the U.S. Federal Reserve
will raise its benchmark rate this year, which will provide
another reason for Bank Indonesia to continue lowering its rates.

A low interest rate is seen as crucial for reducing the
government's burden in servicing its domestic debts, whose
interest rates are mostly tied to Bank Indonesia's rate.

A low interest rate is also helpful for the private sector, as
it will force banks to cut their rates for commercial loans. This
would spur business activities, which in turn would boost the
country's economic growth.