Lower interest rates await Fed rate cut, says minister

JAKARTA (JP): The government said on Wednesday it expected Bank Indonesia's interest rates to fall after the United States' Federal Reserves lowered its rates sometime in late August.

Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti said if the Fed lowered its rates, it was time for Indonesia to follow suit.

"We're waiting for the Fed's decision to cut its rates for the seventh time now, which some say will be on Aug. 21," Dorodjatun told the media, after meeting with House of Representatives Speaker Akbar Tandjung.

His statement came after Bank Indonesia hiked its interest rate to 17.3 percent on Wednesday from 17.13 percent in the previous week.

Despite the rupiah's recent upsurge, Bank Indonesia refrained from cutting its interest rates, saying it ought to remain high to keep inflationary pressure in check.

Dorodjatun, however, said rates had to go down to allow the private sector to seek more affordable capital.

"We need to cut rates to revitalize the private sector so that it can create new jobs in rural and urban areas," he said.

Dorodjatun, hinting on a drastic rate cut, reiterated a statement he made last week on prioritizing job creation.

Experts hailed this new policy direction, but questioned how he would achieve it as interest rates were still high.

Without lower rates, they said, investment would be expensive, thus thwarting efforts to create more jobs.

Expectations that Bank Indonesia will ease its money policy has been growing as the rupiah has been strengthening due to the market's confidence in the new government.

However, Bank Indonesia dashed these hopes, saying it was awaiting for the economy to show concrete signs of recovery.

On Tuesday, the central bank said rates would remain high to reduce the base money supply to the targeted Rp 108 trillion (about US$12.34 billion).

According to Bank Indonesia Governor Sjahril Sabirin, the current base money supply stands at over Rp 110 trillion.

He said too much liquidity gave rise to inflationary pressure and made room for speculators to attack the rupiah.

Dorodjatun said the government and the central bank agreed to improve coordination of their fiscal and monetary policies.

In America, a longer than expected economic slow down has led to mounting pressure on the Feds to further cut its interest rates.

The move is deemed necessary to prevent America from slipping into recession and dragging down much of the global economy with it.

Since this year, the Fed has lowered the benchmark rate by a total of 2.75 percentage points, bringing it to 3.75 percent.

Just like other economies in the Southeast Asian region, Indonesia felt the impact of the slow down with a sharp loss in export revenue.

The rupiah gaining on the greenback in the past three weeks has further hampered export sales.

But signs of the rupiah loosing its steam surfaced with the unit trading down at 8,750 on Wednesday from 8,430 the day before.

Dealers attributed the sharp drop in profit taking following the rupiah's earlier gains.

Director of the Institute for Development of Economics and Finance (Indef) Bustanul Arifin said the rupiah's rally would likely not last with massive foreign debts still haunting the unit.

He said the market had also become more wary over the upcoming economic programs of the new government.

Senior executive at the Association of Indonesian Exporters Irwandy Muslim Amin said importers who had bought the dollar at 11,000 were severely hit by the rupiah's gains.

"If the rupiah's value strengthened to more than 8,500, exporters will certainly suffer losses," he said.(bkm/03)