Interest rate may return to 15%, BI says

JAKARTA (JP): Bank Indonesia deputy governor Miranda Goeltom said on the weekend she was upbeat the central bank's benchmark interest rate would return to its precrisis level of 15 percent within the next few months.

Miranda said that easing inflationary pressure and the strengthening of the rupiah against the U.S. dollar would give more space for a further cut in the benchmark interest rate.

"Over the next one or two months, the interest rate could drop to about 15 percent," she told a media briefing on Friday.

The benchmark interest rate of Bank Indonesia's one-month SBI promissory notes jumped to as high as 70 percent in August last year from between 15 percent and 17 percent before the financial crisis hit the country in the last half of 1997. The SBI rate started declining early this year and reached 20.34 percent last week in line with easing inflationary pressure and the strengthening of the rupiah.

Miranda said the recent drop in the interest rate was not drastic.

"It's not a drastic drop. It's what the market wants," she added.

The sharp cut in the interest rate, however, did not weaken the exchange rate of the rupiah.

The rupiah managed to strengthen to Rp 6,500 per U.S. dollar at one point last week, compared to more than Rp 8,100 early this month. The rupiah, however, was slightly lower in value during the last two days of last week, closing at Rp 6,910 to the dollar on Friday.

"It's just normal profit taking," Miranda said.

"We won't intervene in the market. We're not going to waste our forex reserves," she added.

Miranda said the central bank would continue to lower the benchmark interest rate on the back of low inflation.

The central bank predicted that inflation would be between 10 percent to 13 percent by the end of this year, compared to last year's 77.63 percent.

"The annualized inflation in the last six months is still below 10 percent," Miranda said

The monthly inflation rate in March, April and May was negative.

Government and central bank officials are optimistic that inflation in June would be either negative or zero.

International Monetary Fund Asia Pacific director Hubert Neiss called on the central bank last week to allow domestic interest rates to further decline to advance the country's economic recovery.

Indonesia was advised by the fund, which has organized a multibillion dollar bailout fund for the country, last year to squeeze money supply and jack up interest rates to curb inflation and strengthen the ailing local currency.

Separately, a Bank Indonesia economist said the sharp cut in the benchmark interest rate had not weakened the rupiah, partly because of bullishness on the local stock market.

Halim Alamsyah, head of the economic and monetary policy research division at the central bank, explained that the drop in interest rates had triggered investors to shift their investment portfolio into stocks, and at the same time foreign investors deemed the interest rate cut would help improve the country's economic fundamentals.

He said the inflow of hard currency into the stock market had further strengthened the exchange rate of the rupiah.

"The rupiah strengthened even though the interest rate was cut. It's against conventional theory. But we think its because of the stock market phenomenon," he said at the weekend gathering.

The local stock market has been on a strong rally following the country's landmark peaceful June 7 general election.

The Jakarta Stock Exchange composite index passed the 700 point level at one point last week, a level reached during the precrisis period in the middle of last year, compared to the 583 point early this month.

But the JSX index slightly lowered during the past two days of last week, closing at 673.15 on Friday. (rei)