SBI interest policy 'costly, less effective'

SBI interest policy 'costly, less effective'

JAKARTA (JP): Bank Indonesia's policy of offering high
interest rates for its SBI promissory notes was costly and could
not be sustained for a longer period, an economist at state-owned
investment firm PT Danareksa Sekuritas said on Tuesday.

Raden Pardede said that open market operation by selling SBIs
at high rates could not continue forever because the capacity to
bear the burden was not unlimited.

"Where will the money come from (to pay SBI yields)," he told
a group of journalists at his office, adding that the central
bank had to allocate up to Rp 3 trillion per month to pay the
high rates.

He explained that the central bank had so far been able to
maintain the high SBI rate policy because it might have enjoyed a
lucrative business in the foreign exchange market as part of its
intervention measures.

"But this can't go on forever," he said, pointing out that
there was now little room for Bank Indonesia to make huge profits
from its forex intervention operation.

He added that other funding alternatives included issuing more
SBIs, attaching a skylevel interest rate, and printing new money.

"These alternatives are also limited," he said, adding that
the last option would lead to a run on the inflation rate.

Bank Indonesia started weekly auctions on its SBI one-month
note in July absorbing at least Rp 110 trillion in liquidity by
offering interest rates of between 65.16 percent and 70.58
percent.

Raden, however, questioned whether the high SBI rate policy
was effective in controlling liquidity because of the central
bank's massive liquidity support channeled to troubled commercial
banks since early this year, creating a contradictory loose
monetary condition.

The central bank has channeled more than Rp 141 trillion in
liquidity support to bail out troubled banks with interest rates
of more than the SBI rate which even soared by up to 300 percent
at one time.

Bank BCA, for instance, which received Rp 30 trillion in
liquidity support was charged some Rp 5 trillion in interest and
penalties.

In addition to the liquidity supports, the central bank has
also thrown back to the market some Rp 3 trillion each month in
interest payments for the SBI note holders.

The argument that the high SBI rate would also create a
significant capital inflow to the crisis-hit country was also
doubtful as many believed that the inflow was not more than 10
percent, he pointed out.

He also warned the country's monetary authority that there was
a limit in pushing up the SBI rate to encourage capital inflow.

"There's a turning point. If you offer a 100 percent rate,
people may think that it's junk. This will only cause capital
outflow," he said.

Bank Indonesia is expected to auction more than Rp 12 trillion
of SBI one-month notes today.

Last week the auction resulted in an absorption of Rp 11.5
trillion at a weighted average interest rate of 67.43
percent.

The amount, however, accounted for only 50.72 percent of
incoming bids, raising speculation that domestic interest rates
might slightly ease this week as the remaining liquidity would be
channeled by commercial banks at lower rates either to interbank
money markets or businesses. (rei)