Lower interest rate won't weaken rupiah: Sjahril

Lower interest rate won't weaken rupiah: Sjahril

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on
Saturday that the central bank's policy to further lower its
interest rate would not necessarily lead to a weakened rupiah.

He said the measure could instead pave the way for
strengthening of the currency due to improved confidence in the
economy.

Sjahril emphasized that there was a tendency since September
1998 for declining interest rates to cause strengthening of the
exchange rate of the rupiah to the U.S. dollar.

"But this possibility must not make us overly optimistic
because it could create carelessness and unpreparedness in
anticipating possible risks," he said in a speech at the
anniversary celebration of YARSI University.

The central bank has allowed the interest rate of its one-
month benchmark SBI promissory note to decline at a pace above
market expectations since March.

It is now slightly more than 35 percent, compared to 70
percent in September.

Sjahril earlier said the interest rate could continue to
gradually decrease despite jitters over possible escalating
political tension ahead of the June general election.

But the International Monetary Fund, the organizer of an
economic bailout program for the country, has warned that the
domestic interest rate should remain high until there is a strong
sign of improving confidence and that inflation is under control.

Many economists have joined the fund in fearing that an
aggressive decline in interest rates will undermine the rupiah
and trigger a rise in inflation.

"But this simple way of thinking forgets that there's another
influential factor, that is a change in confidence," Sjahril
countered.

He said that enhanced confidence could accelerate the
country's economic recovery quicker than many people earlier
projected.

He explained the confidence factor could effect an upward
spiraling effect in which improving confidence could strengthen
the currency, which would in turn strengthen confidence in the
outlook of the economy.

Sjahril noted the country's economic crisis, which started in
the middle of 1997, was provoked by a drop in confidence, which
sent the rupiah tumbling and inflation soaring.

He added that the tight monetary policy employed by the
central bank since early last year helped rebuild confidence
because the market considered it a "we mean business" attitude.

"These measures and transparency (in monetary policy) have
been an important factor in rebuilding confidence." He added that
the government's consistency in its economic reform programs also
was a positive factor.

The country posted 0.18 percent deflation in March from the
level in February. The rupiah has flirted with Rp 8,600 to the
dollar during the past several months, compared to a record-low
Rp 17,000 at the height of the crisis in January 1998.

Independent economists, however, warn that inflation may
increase again in the run-up to the June general election, which
may prompt the central bank to allow the interest rate to
increase in an effort to curb inflation and prevent the rupiah
from plunging.

A lower interest rate and a stable macroeconomic condition are
key factors to ensure the success of the government bank
recapitalization program, itself essential to achieving economic
recovery.

A high interest rate environment poses a threat to the banks'
capital condition because of the negative interest rate spread
problem, resulting from the higher time of deposit interest rates
than the lending rates charged by the banks.

It also obstructs restructuring of the high rate of
nonperforming loans of the banks.

"Lower inflation and a stable currency will prompt a further
decline in interest to the normal level, which will help
alleviate the negative spread problem suffered by the banks and
strengthen their capital condition," Sjahril said. (rei)