Lower Fed rate won't cut local rate: BI

Lower Fed rate won't cut local rate: BI

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on
Thursday that the United States Federal Reserve 50-basis-point
interest rate cut would not automatically trigger a decline in
domestic interest rates here.

"(The Fed rate cut) would not automatically cause domestic
interest rates to also decline," Sjahril told reporters on the
sidelines of a gathering with bankers at the central bank's
headquarters.

"We will observe the development of the exchange rate of the
rupiah within the next few days to determine what action to take
on the interest rate," he added.

But Sjahril did not provide further details.

The Fed cut down its federal funds rate to 6.0 percent from
6.5 percent on Wednesday in a bid to revive the ailing U.S.
economy.

Bank Indonesia has been allowing domestic interest rates to
increase in a bid to help stabilize the ailing rupiah and curb
inflation.

The benchmark interest rate of the one-month Bank Indonesia
SBI promissory notes continued to increase to 14.73 percent at
the weekly Wednesday SBI auction, compared to 14.53 percent at
the previous week's auction.

But there has been concern that rising domestic interest rates
would threaten the financial condition of local banks, which have
just been recapitalized by the government, and create a heavier
burden on the state budget in financing the cost of the bank
recapitalization program.

The government has issued around Rp 430 trillion (US$45
billion) worth of bonds, which partly carries the variable
interest rate, to help finance the bank recapitalization program.

Meanwhile, at the same meeting on Thursday, Bank Indonesia
deputy governor Miranda Goeltom said that the central bank would
let market forces decide domestic interest rates.

She explained that the size of the monetary base would be a
crucial factor in deciding whether or not domestic interest rates
would decline.

"If the monetary base declines, then the SBI interest rates
can decline (at the next auction)," Miranda said, adding that she
expected the monetary base to decline in the coming weeks given
that the recent rise of money in circulation was primarily due to
the year-end festivities.

Miranda also said that lower domestic interest rates would not
necessarily cause pressure on the rupiah because the exchange
rate of the currency was basically driven by supply and demand.

She said that demand for U.S. dollars would slow down,
particularly as the state-owned oil and gas firm, Pertamina,
would no longer need dollar supplies as big as their requirements
at the of last year.

"If there is no other uncertainty, the rupiah could
strengthen," she said.

The rupiah dropped to as low as Rp 9,575 per U.S. dollar late
last year, more than a 27 percent drop from the level early last
year, due to a combination of domestic political uncertainty and
external factors.

But experts have also said that strong demand for dollars from
the corporate sector, including Pertamina, at the year-end
exerted pressure on the local unit. Pertamina needs dollars to
repay foreign debt and finance higher fuel imports. Many
companies also purchased dollars to repay their overseas debts
maturing at the end of the year.

Sjahril also expected the rupiah to strengthen if the domestic
political condition improved.

"The rupiah will soon come back to its usual level, and
hopefully it will get stronger within the next few weeks,"
Sjahril said.

The government has targeted an average exchange rate level of
Rp 7,800 per dollar this year.

Experts said that weakening of the local currency has also
created inflationary pressure, as domestic production systems are
heavily reliant on imported raw materials.

The Central Bureau of Statistics (BPS) said on Wednesday that
inflation in 2000 reached 9.35 percent, compared to the
government target of between 5-7 percent.

But Sjahril said that "core inflation" for the year was
expected to be within Bank Indonesia's target of between 3-5
percent.

"We'll see next week what the precise figure is, but I don't
think it will differ from the target," Sjahril said.

Experts have said that the higher level of inflation
experienced last year was also driven by the increase in fuel
prices and other administered prices.

Core inflation excludes non-monetary factors, such as
government administered prices. (tnt/rei)