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)