Interest rate `low enough', further cut unlikely: BI
Interest rate `low enough', further cut unlikely: BI
Dadan Wijaksana, The Jakarta Post, Jakarta
After guiding its benchmark interest rate down for the past year,
Bank Indonesia said on Friday that the current rate was "low
enough," signaling for the first time that a further rate cut in
the near future would be unlikely.
"Interest rates have been low enough, but let's see the next
development about whether they will fall further," central bank
governor Sjahril Sabirin said.
The interest rate on the one-month Bank Indonesia SBI
promissory notes is now at 10.91 percent, compared to more than
17 percent early last year.
Lower interest rates are good for the economy because it could
encourage domestic banks to start providing new lending to the
private sector.
On the other hand, a lower interest rate is also good for the
government as it would mean a lesser burden in servicing its huge
domestic debts, whose interest rates are linked to the SBI rate.
One estimate says that a 1 percent decline in the SBI rate
means the government could save up to Rp 2 trillion in repaying
the interest of bank recapitalization bonds.
Sjahril's statement, however, was in stark contrast to those
voiced by some economists, who expect to see further interest
rate cuts on the back of benign inflation and the stronger
exchange rate of the rupiah against the U.S. dollar.
Economists have predicted under the current stable
macroeconomic condition, that the benchmark interest rate could
further decline to as low as 10 percent.
The solid performance of the rupiah against the dollar in the
past months has helped keep inflation low, with April year-on-
year inflation standing at 7.54 percent.
The state budget targets the full-year inflation at 9 percent.
The macroeconomics stability lately gained a new momentum when
the Indonesian Banking Restructuring Agency (IBRA) sold a 51
percent stake in Bank Danamon to a consortium led by Singapore's
Temasek Holdings and Germany's Deutsche Bank.
The controversy-free sale process has boosted confidence among
international investors over the government's commitment to
continued reform programs, which according to analysts are being
followed by a significant amount of capital inflows.
As a result, the rupiah has been on record highs lately. The
stronger local unit was also helped by the fact that the U.S.
dollar has been on a weakening trend against other major
currencies.
On Friday, the rupiah closed the day at 8,545 per dollar.
And as the overall sentiment remains bullish, dealers expect
the rupiah to strengthen even further.
Meanwhile, Bank Indonesia early on Friday cut its overnight
money market intervention rate by 25 basis points to 10.75
percent -- its fourth easing this year -- after the benchmark
one-month SBI rate declined to 10.91 percent on Wednesday, from
11.06 percent the previous week.
The intervention rate is the interest that the central bank
pays commercial banks for deposits.