Interest rate rise seen as temporary and localized

JAKARTA (JP): The current increase in banking deposit rates is only temporary because its main objective is to curb capital outflows, I Nyoman Moena, a former chairman of the Association of Private Domestic Banks (Perbanas), said.

"The nature of the increase is very temporary and very local," he said.

He added that the rise was due to the immediate cash needs of a number of large banks, which are expected to lower the rates again as soon as they have obtained the necessary funds.

Dozens of banks started raising their short-term deposit rates by between half and one-and-a-half percentage points earlier this month, sparking controversies saying it may affect transactions in local stock markets and lending rates, which could slow economic growth.

Private banks such as Bank Windu Kentjana, Bank Dharmala and Bank Bira have set their rates at between 10 percent and 11 percent per annum on one-month deposits, 13 percent on three- month deposits and 13.5 percent and 14 percent for six-month and one-year deposits.

The state-owned banks, including Bank Rakyat Indonesia, Bank Bumi Daya, Bank Negara Indonesia and Bank Dagang Negara, raised their deposit rates to between 10 and 12 percent.

Analysts said that the increase is closely related to the recent move by the Federal Reserve of the United States to increase its interest rate in a bid to tighten the U.S. monetary policy and to maintain favorable trends in inflation and thereby sustain economic expansion.

The Federal Reserve has increased its interest rates four times this year, from three percent in February to 4.25 percent in May.

Banker Eddy Handoko of LippoBank and analyst Rijanto Sastroatmodjo told reporters on Wednesday that such a move will hamper Indonesia's fledgling capital market and will prompt bankers to increase lending rates.

Discouraging

Immediate effects of such an increase, Handoko said, are discouraging business people from taking loans. That will slow down the pace of development.

According to Rijanto, the interest rate increase in the U.S. has already affected the London Inter-Bank Offered Rate (LIBOR) as well as the Singapore Inter-Bank Offered Rate (SIBOR).

He said that the difference between Indonesia's interest rates and those of the two institutions has narrowed over the last three months, indicating to local bankers that they should enlarge their deposit rates.

He added that the difference between LIBOR and the Indonesian rates had decreased from 10 percent in December 1993 to 5.8 percent in April 1994.

"This is sufficient reason for local bankers to raise their deposit rates," he said.

Moena was quoted by Antara as saying yesterday that the government will not let higher deposit and lending rates hinder the economy.

He said the government may intervene in the money market by opening the flow of various credits, such as loans to small-scale enterprises, or by lowering interest rates on Bank Indonesia Certificates and money market securities. (09)