Rupiah dip not due to interest rates: BI

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on Tuesday the weakening of the rupiah was not caused by declining domestic interest rates, but rather demand for U.S. dollars.

He said that although nominal interest rates had fallen over the past few months, real interest rates were still high.

"(The weakening of the rupiah) is not because of the interest rate drop," Sjahril said on the sidelines of a seminar on the Year 2000 problem.

The rupiah closed unchanged at Rp 6,980 to the dollar on Tuesday.

Dealers said the market was bullish on the dollar, but Bank Indonesia and state banks appeared to intervene every time the dollar tried to strengthen past the Rp 7,000 level.

The local currency has weakened over the past week, falling from Rp 6,707 to its current level.

Some traders said declining domestic interest rates and increasing political uncertainty over the upcoming November presidential election were the primary factors behind the weakening of the rupiah.

"I think a weakening of one or two days is a normal thing. There's also a real need for the U.S. dollar right now," Sjahril said without elaborating.

Some economists said dollar demand would increase as more companies reached debt restructuring deals with their foreign creditors.

"A restructuring deal means companies still have to repay their foreign debts and some people think the dollar has been quite cheap lately," said an economist at a securities firm.

Sjahril also dismissed suggestions the rupiah weakened because of market jitters caused by domestic political developments.

The central bank has allowed its benchmark interest rate to decline on the back of lower inflation.

The interest rate on Bank Indonesia's one-month SBI promissory note is now at 14.57 percent, compared to more than 35 percent earlier this year.

Sjahril said the benchmark interest rate could continue to fall as long as inflation remained low.

"Inflation in July may still be negative," he said.

The central bank expects the benchmark interest rate to drop to below 12 percent by the end of this year, which would lead to a further decline in bank lending rates. A decline in lending rates would allow the real sector to easier obtain bank financing.

Bank Indonesia expects inflation this year to be slightly higher than 6 percent.

The economy has enjoyed deflation for four months in a row beginning in March.

At the height of the economic crisis last year, the economy suffered hyperinflation of more than 77 percent.

Bank Indonesia officials earlier said the benchmark interest rate could fall below 10 percent by the end of this year if inflation was capped at below 6 percent.

"But this may not be possible," Bank Indonesia's Miranda Goeltom recently said.

She said inflation could soar in December during the traditional festive season. (rei/cst)