Interest rate down this week, more cuts to come: BI

Dadan Wijaksana, The Jakarta Post, Jakarta

The Bank Indonesia benchmark interest rate fell again on Wednesday, with the central bank hoping to maintain this downward trend on signs of easing inflationary pressure, a strengthening of the rupiah and slower growth in the money supply.

"There is still room for (more) rate cuts," Bank Indonesia said.

At the weekly auction on Wednesday, the weighted average interest rate on Bank Indonesia's one-month SBI promissory notes was down to 16.26 percent, from 16.50 percent last week.

The central bank, under pressure from various quarters, has been attempting to lower the country's punitively high interest rate, which at the end of last year stood at about 18 percent.

A lower interest rate would help ease the burden on the state budget in servicing the huge amount of government bonds issued to bail out ailing banks.

A favorable interest rate environment would also help boost bank lending, particularly to the real sector, which would in turn help push economic growth.

Bank Indonesia announced on Tuesday it would apply a market- friendly strategy by providing more opportunities for interest rate cuts.

"For that, monetary policy strategies that can cautiously open chances for the lowering of rates should be maintained," the bank said in a press release.

The economy enjoyed its second straight month of deflation in April, thanks to lower food prices and a stronger rupiah. Inflationary pressure had been strong in the first two months of 2002.

The rupiah has risen against the US dollar for the last several months. In April, the rupiah strengthened significantly to close at Rp 9,330 per dollar, a 5.3 percent increase from March's closing of Rp 9,825.

Slower growth of the money supply in April because of the large amount of tax payments made it easier to cut rates for the time being, the central bank said.

Meanwhile, expectations of a lower interest rate in the coming weeks pushed the Jakarta Composite Index higher on Wednesday.

Shares ended marginally higher at 547.741, a 0.5 percent increase from the previous day's close. The market was closed on Thursday.

In a related development, Reuters, quoting a statement from the central bank, said year-on-year economic growth in the second quarter of this year would reach 3.5 percent to 4 percent on the back of strong domestic consumption.

This figure is an improvement from the central bank's first quarter estimate of about 3.2 percent.

But Bank Indonesia did not say whether it would revise its full-year growth projection of 3.5 percent to 4 percent.