Local banks advised to raise deposit rates
Local banks advised to raise deposit rates
JAKARTA (JP): Analysts are warning that banks must raise
annual interest rates on time deposits by at least one to two
percentage points to curb capital flight resulting from the
recent rises in interest rates in the United States.
Riyanto Sastroatmodjo warned here yesterday that the
adjustment of domestic interest rates is essential to curb
capital outflow.
"Interest rates on rupiah time deposits should be raised to
between 15 percent and 16 percent per annum," he said, citing the
ideal level for interest rates.
On Tuesday, the U.S. Federal Reserve raised the discount
rate and the federal fund rate by 0.75 percentage point to 4.75
percent and 5.5 percent per annum respectively. The increases
were the largest since May 1991, when the Fed pushed the discount
rate by a full point to 14 percent. It is expected to further
push up interest rates to at least six percent per annum on time
deposits in the American dollar offered by overseas banks.
The interest rates of three-month rupiah deposits offered by
local banks currently range between 13 percent and 15 percent per
annum. Major banks and state banks usually offer a lower rate of
13 percent, while medium-scale and small banks offer between 14
percent and 15 percent.
Analysts at foreign banks also fear the rise in the U.S.
interest rates will result in a great amount of capital flight
from the domestic money market.
Inflation
They said that Indonesia's high inflation rate is another
reason why raising the interest rates of the local banks is
urgent.
Riyanto, a commissioner of a number of private banks, said
the interest rate adjustment should begin with the increase in
the discount rates of Bank Indonesia's Certificates, the central
bank's instrument in managing the money supply.
Drying up
He said that the high interest rates overseas could draw off
foreign currencies from Indonesia, thereby drying up foreign
exchange reserves in local banks.
In April this year, the erosion of foreign reserves held by
commercial banks reached as high as $3.5 billion as a consequence
of the increase in interest rates overseas, he said.
"Besides adjusting its discount rates, Bank Indonesia (the
central bank) should also more closely monitor foreign commercial
loans," said Riyanto, a former senior official of the central
bank.
He said that the higher lending rates on overseas money
markets would put a heavier burden on the country's debt
servicing capability.
Indonesia's private borrowing totaled around $37 billion,
accounting for around 40 percent of Indonesia's total external
debts, which amounted to $93 billion as of October. (hen)