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)