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.