Lower interest rates await Fed rate cut, says minister

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)