Interest rates expected to rise: Economist

Interest rates expected to rise: Economist

SEMARANG (JP): Bank interest rates are expected to rise next
year despite persistent efforts to cut them, economist Sjahrir
said here yesterday.

Sjahrir told a seminar the rate rise would be driven by the
central bank's reserve requirement policy forcing commercial
banks to increase their minimum reserves to 5 percent of their
net weighted assets next April from 3 percent.

"Such an increase in the reserve requirement will
automatically reduce money supply. And it could drive up interest
rates," Sjahrir said.

Bank Indonesia announced the new reserve requirement in
September, requiring banks to place 5 percent of their third
parties' funds (time deposits, savings and cash) in their central
bank accounts.

The country's 240 commercial banks' savings and time deposits
were worth Rp 252.2 trillion (US$106.4 billion) in September,
according to Bank Indonesia.

Sjahrir's statement on a possible interest rate rise
contradicts many who have predicted commercial banks would soon
lower their lending rates because of too much liquidity, lower
inflation rates and political pressure.

The inflation rate is expected to be below 7 percent this
year, compared to 8.64 percent last year and 9.24 in 1994.

Earlier this year, State Minister of Research and Technology
B.J. Habibie proposed the central bank spearhead efforts to halve
interest rates.

His call drew wide support, forcing state banks to cut their
deposit rates by between 0.5 percent and 1 percent. Private banks
have not followed the state banks' rate cut.

Bank Indonesia Governor J. Soedradjad Djiwandono told a
seminar in Jakarta Wednesday that forcing banks to cut their
interest rates was difficult. He said many banks depended on
large depositors who demanded higher interest rates.

"It must be very difficult for these kinds of bank to cut
their rates," Soedradjad said.

An independent research group has estimated that almost 25
percent of funds at commercial banks were controlled by several
people.

Sjahrir said the interest rate rise would attract more capital
inflow because of widening differentials between domestic and
foreign interest rates.

The speculative inflow, driven by interest rate differentials
rather than economic fundamentals, could undermine macroeconomic
management. And it would not finance productive projects.

The inflow, if not well managed, would strengthen the rupiah
against major currencies and eventually weaken exports, Sjahrir
warned. (har/rid)