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.