Rate drop doesn't indicate softer monetary policy

JAKARTA (JP): Bank Indonesia said that this week's slight decline in the interest rate of Bank Indonesia SBI promissory notes did not signal the implementation of a more relaxed monetary policy by the central bank.

Bank Indonesia deputy governor Achjar Iljas said that inflationary pressure was still a concern to the central bank.

"(The interest rate decline) is only a result of supply and demand factors. It is too early to say that we will see a further decline in the interest rate," Achjar told The Jakarta Post on Thursday, on the sidelines of a meeting with the House of Representatives special team for the amendment of the central bank law.

The interest rate on one-month SBI notes was reduced for the first time in several months to 14.81 percent on Wednesday, down from 14.85 percent at the previous week's auction.

Bank Indonesia had allowed the interest rate to continue increasing since the middle of last year amid concern over inflationary pressure and the weakening local currency.

But the new Bank Indonesia foreign exchange ruling aimed at curbing speculation against the rupiah by cutting the supply of rupiah offshore, is expected by the government to be effective in removing strong pressures on the local unit, thereby allowing for an easing of interest rates.

Coordinating Minister for the Economy Rizal Ramli said earlier this week that the new forex ruling would help strengthen and stabilize the exchange rate of the rupiah against the U.S. dollar, which in turn would also reduce inflationary pressure from imported goods and provide room for Bank Indonesia to allow interest rates to decline.

The government wants a lower interest rate to help revive the real sector and kickstart a stronger economic recovery.

A further increase in domestic interest rates would also create a greater burden on the state budget to cover the interest costs of government bonds issued to help finance the country's bank recapitalization program.

But Bank Indonesia Governor Sjahril Sabirin said earlier this month in a press conference unveiling the central bank's 2001 program, that Bank Indonesia would maintain its tight monetary policy this year in a bid to achieve a low inflation rate between 4 percent to 6 percent.

Sjahril said that low inflation was crucial for ensuring long- term economic growth.

Sjahril had also said that the central bank would manage its tight monetary policy in such a way so as not to stifle the current economic recovery process.

Bank Indonesia is an independent central bank.

Inflation last year reached 9.3 percent, far higher than the initial government and Bank Indonesia target range of 5 percent to 7 percent.

The central bank has said that inflationary pressure this year would remain strong due to the government's plans to increase fuel and other government controlled prices in a bid to reduce the state budget's burden of financing price subsidies.

Achjar also said, on a separate occasion on Friday, that Bank Indonesia could not force banks to provide more lending to the real sector despite the reasonably large amount of third party funds laying idle in the banks.

"Bank Indonesia cannot force banks to lend," he told reporters following the Friday weekly prayer at the central bank headquarters.

"What is important is to restore a climate conducive to investment so that banks can resume lending," he added.

Achjar was responding to Rizal's statement on Thursday that he would meet with the central bank to discuss ways of boosting bank lending.

Rizal said that the current loan-to-deposit-ratio of most banks was only 36 percent, which was much lower than the standard 90 percent to 100 percent ratio.

He said that banks must provide more credit to the real sector to boost economic recovery. (rei)