Interest rate rise seen as temporary and localized

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)