Interest rates may rise next month

Interest rates may rise next month

JAKARTA (JP): Bank interest rates, which have been sliding
recently, will be put to the test later this month when banks
have to settle their income tax, or early next month when they
have to fulfill the new reserves requirement.

C. Harinowo, head of the monetary management department at
Bank Indonesia, said bank interest rates had been decreasing by
up to 2 percent due to over liquidity in the banking system and a
lower inflation rate.

He, however, said the downward trend in interest rates might
be halted by an increase in the central bank's reserve
requirement early next month.

"Interest rates will stop decreasing in the short term when
supply (deposits) and demand (credits) reach a new equilibrium,"
Harinowo said after addressing a seminar at the Centre for
Strategic and International Studies here Thursday.

Harinowo said prime lending rates at large banks currently
stood at 18.5 percent per annum, compared to over 20 percent
early last year. Prime deposit rates currently stood at 16
percent, compared to up to 19 percent early last year.

He said the oversupply of funds in the banking system would
diminish soon when banks had to pay their income tax which is due
this month and deposit some of their third parties' funds with
the central bank as mandatory reserves.

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

In the long run, Harinowo said the level of domestic interest
rates would be influenced by the level of inflation and the U.S.
Federal Reserves' decision on interest rates.

Indonesia's interest rates have been considered among the
highest in the region, attracting speculative funds to enter the
country to benefit from interest rate differentials.

Local industries have been repeatedly complaining about the
high interest rates.

The issue of cutting interest rates surfaced last year when
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 and lending rates by between 0.5 percent and 1 percent
late last year.

Private banks, spurred by more liquidity and political
pressure, followed the state banks' rate cuts.

"If Bank Indonesia tried to bring the rates down, would you
still maintain the current rates or even increase them?" asked
Rudy Ramli of Bank Bali.

The central bank has taken steps to lower interest rates
through several instruments, including reducing the interest
rates of Bank Indonesia Certificates.

The certificates' annual interest rates dropped from more than
13 percent in early 1996 to about 12 percent at the end of the
year and 11 percent late January.

Political pressure

Harinowo contended that cuts in Indonesia's interest rates
were purely driven by market mechanism, and not by political
pressure.

He said large banks currently had too much liquidity because
the amount of funds they raised from the public exceeded that of
their credits last year.

Last year, third parties' funds at the country's commercial
banks rose by Rp 53.6 trillion (US$22.2 billion) to Rp 201.4
trillion as of last November. Meanwhile their credits increased
by Rp 44.5 trillion to Rp 258.4 trillion.

In 1995, third parties' funds increased by Rp 45.9 trillion,
while credits grew by Rp 48.4 trillion.

Besides, Harinowo said, Indonesia recorded a lower inflation
rate last year, at 6.47 percent, compared with 8.64 percent
recorded in 1995.

"From last year's inflation rate alone, banks could cut their
interest rates by 2 percent," Harinowo said.

Economist Hartojo Wignjowijoto argued that the declining
domestic interest rates were largely driven by the movement of
interest rates in developed countries, especially in the United
States.

He agreed that the country's banking system held too much
liquidity as a result of incoming foreign exchange, especially
U.S. dollars which is used to benefit from interest rate
differentials.

Bank Indonesia data shows that net foreign assets in the
country's banking system increased dramatically from Rp 31.9
trillion as of January 1996 to Rp 50.6 trillion as of last
December.

Because of over liquidity in the banking system, the central
bank earlier this month lowered its discount rate for short-term
money market securities by 50 basis points.

The central bank did not announce the cut but money dealers
said the key rate for one-week securities was cut to 14.75
percent, for two-week securities to 15 percent and for one-month
securities 15.50 percent.

Money market securities are short-term securities purchased by
the central bank to inject liquidity into the banking system.
(rid)