Interest rates raised to curb inflation
JAKARTA (JP): Bank Indonesia (BI) raised interest rates on its short-term promissory notes (SBIs) again yesterday for all terms except overnight in an effort to curb inflation and strengthen the rupiah.
BI governor Sjahril Sabirin told reporters the rate increase was "aimed at absorbing excess liquidity in the market which could lead to higher inflation and further weaken the rupiah".
"The overnight SBI rate will be maintained at 40 percent, but all other rates have been raised to as high as 45 percent for one-month SBIs," the central bank's chief said.
Sjahril said the interest rate on two-day SBIs was raised to 41 percent from 35 percent, three-to-six days to 42 percent from 30 percent, one week to 43 percent from 25 percent, two-week rates to 44 percent from 24 percent and one-month SBIs to 45 percent from 22 percent.
Two-month SBI interest rates have been raised to 40 percent from 20 percent, three-month ones to 30 percent from 19 percent, six-month ones to 20 percent from 18 percent and one-year terms to 18 percent from 16 percent.
He said both narrow money (M1) and broad money (M2) supply, had expanded tremendously during December and January but plateaued in February.
M1 money supply increased 12.15 percent month-on-month in December to Rp 78.3 trillion (US$8.7 billion at the current rate) and 18.45 percent in January to Rp 92.8 trillion, but dropped slightly to Rp 92.5 trillion in February.
Similarly, M2 rose 7.59 percent in December to Rp 355.6 trillion and 26.73 percent in January to Rp 450.7 trillion but dropped to Rp 430.2 trillion in February.
"Early indications show a relatively high increase in both monetary aggregates (M1 and M2) for this March. Therefore, the government feels it necessary to contain the growth of those monetary aggregates by quickly increasing SBI rates," Sjahril said.
Sjahril said BI would quickly adjust SBI rates as and when market developments warranted it.
"Once the market allows us to relax liquidity controls, we will cut our SBI rates. But we could also raise SBI rates when pressure on the rupiah and inflation intensifies again," Sjahril said.
BI director for banks development and supervision Mukhlis Rasyid said the increase in SBI rates was an alternative to helping shore up the rupiah, which has dropped by more than 70 percent against the U.S. dollar since early July.
He warned that the policy could cause trouble for domestic banks which currently face liquidity problems and make fund- raising more difficult for businesses.
"Interest rate increases benefit no one, neither banks nor the business sector. The cost of funds will increase, and it will be more difficult for companies to get funding," he said.
He indicated that only foreign banks and joint-venture banks would benefit much from the SBI rates increase as they were currently enjoying excess liquidity.
However, he noted that the benefit of a stronger rupiah would be greater than the drawback of increasing the cost of funds.
BI director for monetary and economic statistics and research, Miranda S. Gultom, said the new SBI rates showed the central bank's faith in using market-friendly instruments to stabilize the rupiah.
International Monetary Fund (IMF) Asia-Pacific director Hubert Neiss welcomed the central bank's decision to raise interest rates.
Neiss was quoted by AFP as saying that further action could be expected to reinforce policy objectives.
Neiss is here for talks with Indonesian officials to review the implementation of wide-ranging reforms in return for US$43 billion in IMF financing to help the country overcome its economic crisis. (rid)