Interest rates predicted to remain high next year

JAKARTA (JP): Interest rates are likely to remain high next year despite an estimated one percentage point drop in the inflation rate, say analysts.

Rijanto, a senior banking analyst, said Thursday the prime lending rate would still hover between 20 percent and 21 percent.

"The lending rate to non-prime customers will be well above 21 percent," he said.

Rijanto said most local banks were not ready to cut their lending rates, not only because of expected tighter liquidity in coming years but because their operational costs were rising.

The local banks' cost of funds is projected to increase to 0.6 percent next year from 0.4 percent this year, he said, adding that the cost of funds were increasing because of banks' "special offerings" to large depositors.

"Such an offering is important nowadays to enable them to keep their large depositors," said Rijanto, a former senior official of Bank Indonesia, the central bank.

I Nyoman Moena, another senior banking analyst, said the cost of funds would increase as a natural impact of tight monetary conditions.

He said the central bank's plan to raise the legal reserve requirement to 5 percent of bank deposits beginning next year from 3 percent would contract the money supply.

"As a result, monetary liquidity will become tighter and the impact is clear, interest rates will be steady," he said.

Nyoman, a former senior official of the central bank, said the domestic money market would become more nervous next year because of the general elections.

"Political uncertainty, combined with the expected tighter conditions mean a more difficult time for the banking sector," he said. "Alertness is therefore important in this situation because a small mistake could create a big problem."

The most important thing is that banks keep their loan-deposit ratios at favorable levels, Nyoman said.

He said that if the banks' finances were not well balanced amid tight liquidity, they would have trouble getting scarce funds.

Earlier this month, controversy arose over the country's high interest rates when State Minister of Research and Technology B.J. Habibie said they were too high.

He asked the central bank governor to intervene in the market and halve deposit rates to 8 percent per annum from their current levels around 16 percent.

Habibie said the deposit rate cut was necessary to stimulate a reduction in lending rates, which are now among the highest in the world.

Economists have since said that halving interest rates was impossible because of high inflation.

Rizal Ramli, a director of the Econit advisory agency, said deposit rates could be reduced by a maximum of one percentage point next year.

"The cut is possible due to the estimated decline in the inflation rate by one percentage point to 7 percent this year," he said.

The inflation rate is estimated to decline to 7 percent this year from 8.64 percent last year. (hen)