Local interest rate to stay low despite U.S. rate hike

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin reaffirmed on Monday that the central bank would not raise interest rates even if the U.S. Federal Reserve increased its rate this week.

Sjahril said that an increase in the U.S. interest rate would not weaken the rupiah because the "margin is still enough" to keep the local currency attractive.

"I don't think we need to worry right now because the domestic interest rate is still relatively high," he told reporters on the sidelines of a closed-door meeting with the House of Representatives Commission XI on finance and the state budget.

He pointed out that the benchmark interest rate of one-month Bank Indonesia promissory notes (SBIs) was at 10.95 percent.

The U.S. Federal Open Market Committee will meet on Tuesday to decide on whether or not to raise short-term interest rates. The financial market is expecting an increase by 25 basis point to 6 percent.

Bank Indonesia officials recently said that even if overseas interest rates rose to 6.5 percent, the current domestic interest rate was still attractive, assuming a 2 percent depreciation rate of the rupiah.

"There won't be a significant shift in monetary policy," Sjahril said.

"The previous increase in the Federal rate also didn't have much impact on the rupiah," Sjahril said.

The Federal Reserve last increased its interest rate by 25 basis point to 5.75 percent in February in a bid to cool down the overheating U.S. economy.

The rupiah closed at Rp 7,448 per U.S. dollar on Monday, compared to Rp 7,455 on Friday.

Bank Indonesia has been determined to keep domestic interest rates as low as possible in a bid to help keep the budgetary cost of the government's bank recapitalization program within a manageable level.

The government has issued bonds to recapitalize and restructure the country's ailing banking sector. The interest costs of the bonds will be covered by the state budget.

A low interest rate environment is also crucial to help businesses restructure bank loans which mostly have turned sour.

Elsewhere, Sjahril said that Bank Indonesia had discussed with the House plans to reduce the number of the central bank's deputy governors from seven to six.

He did not provide details, but legislators said that Bank Indonesia was asked to reduce the number of its deputies because the central bank no longer manages liquidity support and other forms of subsidized credit to the banking sector following the independency status Bank Indonesia obtained by virtue of the new Central Bank Act last May.

Sjahril said that he had also proposed three candidates to the House to replace outgoing deputy governor Iwan R. Prawiranata, whose term will expire in May.

The three candidates are deputy governor Aulia Pohan (whose position is to be terminated) and Bank Indonesia senior officials Burhanuddin Abdullah and C. Harinowo. (rei)