Interest rates raised to curb inflation

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)