Thu, 10 Jul 2003

SBI rate down to 9.23%, further cut still possible

The Jakarta Post, Jakarta

The central bank benchmark interest rate fell again, reaching 9.23 percent on Wednesday amid a persisting low inflationary pressure.

The previous interest rate on one-month Bank Indonesia SBI promissory notes was at 9.30 percent.

Bank Indonesia has been aggressively cutting down the rate in the past year in the hope that it would encourage commercial banks to cut down their lending rates, so that the corporate sector could obtain cheaper loans to expand their businesses.

The move has been made possible because of the relatively low inflation environment, thanks largely to a rapid appreciation in the exchange rate of the rupiah against the U.S. dollar and the public expectation of low inflation.

The central bank said in a statement issued after a meeting of its board of governors on Tuesday that it expected inflation to be in the range of 6.5 to 7 percent, lower than the initial projection of 8 to 9 percent made at the beginning of this year.

"The declining trend in inflation will continue," Bank Indonesia said.

Several analysts have said that if inflation could be maintained at below 7 percent, Bank Indonesia could further cut its benchmark rate to around 8 percent.

The central bank concurred that with the low inflation outlook and stronger rupiah, there was still room for a further cut in the SBI rate.

The central bank, however, noted that despite the cut in the SBI rate, banks had not responded accordingly by lowering their lending rates, which are hovering at 18 percent.

Some businessmen have said that the ideal lending rates should be between 13 to 14 percent.

Bank Indonesia and the Ministry of Finance last week summoned a number of top bankers to discuss various ways to lower the lending rates. Finance authorities expected lending rates could start declining to around 16 percent next month.

Bank Indonesia's statement also said that economic growth in the second quarter of this year was expected to grow at a higher rate of 3.56 percent, compared to 3.43 percent year-on-year growth posted in the first quarter.

In addition, it said that although investments and exports had performed better in the second quarter than in the first quarter, the main driver of second quarter growth was still domestic consumption, although it was beginning to weaken.

The government is targeting an economic growth of 4 percent this year.