Words won't lower interest rates, Soedradjad says

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono said yesterday that words alone would not lower interest rates.

"Interest rates are high...Yes. But the high rate problem cannot not be solved by a word only," he said in an apparent reaction to State Minister of Research and Technology B.J. Habibie's call to sharply slash lending rates from their current levels around 20 percent a year.

According to Habibie, an interest rate cut would promote the competitiveness of Indonesian goods.

Speaking to journalists after a limited cabinet meeting, Soedradjad said yesterday that interest rates could not be reduced if inflation and demand for bank loans remained high.

"There are also many factors which are beyond the monetary authority's control," he said, citing an appreciation of foreign currencies against the rupiah as an example of a factor pushing up domestic interest rates.

The central bank governor said interest rate policies should not be tailored for the benefit of producers and businessmen alone but for depositors as well.

Appeals to lower domestic interest rates, now among the highest in the world, are not new. Members of the House of Representatives (DPR) and businessmen have repeatedly voiced concern over high interest rates. But they went almost unnoticed until Habibie joined the chorus.

Habibie said high interest rates caused strong inflationary pressures, and reducing interest rates would ease these pressures.

Habibie's statement and his zig-zag theory on interest rate reduction to combat inflation have caused controversy in economic circles.

Zig-zag

Habibie said domestic interest rates should be reduced to as low as 4 percent a year under a "zig-zag" mechanism.

The monetary authority should aim to lower interest rates to 4 percent a year by 2010, for example, when the Asia and Pacific Economic Cooperation (APEC) forum's free trade arrangement fully takes affect, Habibie said.

To meet its target, the monetary authority should reduce deposit interest rates to 8 percent from around 16 percent at present, he said.

Although economists have opposed Habibie's monetary hypothesis, they agree domestic interest rates are too high.

According to Bank Indonesia's latest weekly report, the average interest rate on three-month deposits is 17.35 percent, while lending rates for working capital and investment are 19.35 percent and 16.39 percent respectively.

According to the Far Eastern Economic Review, Indonesia's prime (lending) rate is 17 percent, far higher than 2 percent in Singapore, 8.2 percent in Malaysia, 15 percent in the Philippines and 13 percent in Thailand. Indonesia's real interest rate (the prime rate minus inflation) is 10.9 percent, much higher than 0.4 percent in Singapore, 4.9 percent in Malaysia, 6.3 percent in the Philippines and 7.6 percent in Thailand.

Laksamana Sukardi, a senior banking analyst at the Econit advisory agency, said Indonesian banks mostly used the U.S. Federal Reserve's discount rates to determine their time deposit rates.

Federal reserve discount rates are said to push up domestic rates because local banks must consider the rupiah's depreciation against the U.S. dollar when setting their time deposit rates.

"It often happens that domestic interest rates increase while the U.S. discount rates remain flat," said Laksamana, a former director of Lippo Bank.

Bank Nusa president B.S. Koesmulyono said institutional depositors were partly responsible for the country's high interest rates.

It is impossible to reduce interest rates if depositors, especially the big ones, do not understand "our concerns", he said.

According to Koesmulyono, it is risky for banks to cut deposit rates now because institutional and major individual depositors could withdraw deposits from the banks.

"If we cut the rates, big depositors will move to other banks," he said. "And many banks are not ready to face huge withdrawals of funds."

He said cutting interest rates on deposits was the key to reducing lending rates, but it was difficult for local banks to do so because they relied on major depositors.

"Low interest rates do not only benefit producers but also bankers," he said.

Economists estimate that banks will only reduce their interest rates one percentage point next year, because the inflation rate is not expected to drop more than one percentage point. (hen)