Interest rates likely to rise by up to two points

JAKARTA (JP): The recent increase in the U.S. key interest rates will likely push Indonesia's interest rates up by one to two percentage points and will temporarily affect its stock markets, economists say.

"The half a percentage point increase in the U.S. Federal Reserve's prime rates will boost Indonesia's interest rates by at least two percentage points in the near future," Mari Pangestu, chief economist at the Center for Strategic and International Studies (CSIS), told The Jakarta Post here on Friday.

"We should adjust to the international banking moves because our economy has been based on an open capital account scheme," she said, cautioning that the Fed will most likely further increase the prime rates by around one percentage point because the United States is now facing a trend toward strong economic growth this year.

The U.S. Federal Reserve raised its discount rate to 3.5 percent from three percent per annum last Tuesday and interbank federal funds rate to 4.25 percent from 3.75 percent.

Steve Boedy Subroto, Bank Danamon's director for finance and management supervision, said the Fed's move will boost the country's interest rates but the increase will not exceed one percentage point.

"No need for the banks to increase interest by more than one point because the economy is developing at a favorable pace, helping the banking industry enjoy good development," he told the Post.

Boediono, a director of Bank Indonesia, the central bank, said Indonesian banks should not necessarily raise their rates substantially.

He acknowledged that several banks have increased their deposit rates because they need more funds to finance their expansion plans.

"The rise in deposit rates will not lift up lending rates because the spread between deposit and lending rates has been high enough," he said.

Stock markets

Tito Sulistiyo, chairman of the association of Jakarta securities brokers, told the Post that the expected rise in deposit rates will severely hit trading activities on stock markets.

"Increases in deposit rates will force investors to move their investments from the capital to the money market," he said.

He was also worried about the possibility that the increase in U.S. interest rates will encourage foreign investors to draw down their investments from fund managers.

Trading on the Jakarta and Surabaya stock exchanges is thus far dominated by foreign investors, whose activities determine market sentiments.

"If foreign funds are moved to banks in pursuing more benefits, our stock markets will face trouble," he said.

Three increases in U.S. interest rates in the first four months of this year caused the Jakarta Stock Exchange's Composite Index to steadily decline from 592.94 early this year to 467.39 in the middle of this month.

"But I should stress that such a kind of investment shift will take place only temporarily," Tito said. "Our stock markets have developed strongly."

"Our regulations on the stock market and the conditions of supporting institutions are excellent," he said.

Tito added that the rate increase will force players in the stock markets to improve efficiency.

Mari said an interest rate increase will also force entrepreneurs to improve their efficiency to maintain a competitive edge. "I don't think that the rise will be a doomsday for our businessmen because they have been used to high lending rates," he added.

Both Mari and Budiono are optimistic that the expected rise in the country's interest rates will not encourage capital outflow. (fhp)