BI keeps interest rate flat amid threat of inflation

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Sat, 03/08/2008 6:19 PM

In line with the expectations of analysts, the central bank on Thursday kept its key interest rate flat at 8 percent in the face of growing inflationary pressure.

"In general, Indonesia's macroeconomic and financial system conditions are steady amid unfavorable conditions in the global economy," Bank Indonesia Governor Burhanuddin Abdullah said in a statement.

Burhanuddin said increases in the prices of key commodities and energy resources on the global market, as well as growing inflationary pressure around the world, had added pressure to domestic inflation, which could eventually affect the country's economic growth.

The Central Statistics Agency reported Monday that the country's year-on-year inflation rate reached 7.4 percent in February, far higher than the government's target of 6.5 percent, with the price of staple foods rising 11.66 percent from a year earlier.

Analysts had predicted the central bank would maintain its rate to help keep in check the country's inflation rate, which is projected at around 6.5 percent by the end of the year.

The central bank last cut rates in December last year by 25 basis points, from 8.25 percent to 8 percent. During 2007, it cut rates by a total of 1.5 percent.

Bank Indonesia also said its decision to maintain its rate was to attract foreign investment by maintaining the attractiveness of the rupiah against the U.S. dollar.

In February, BI stabilized the rupiah against the dollar at an average of Rp 9,181, up 2.4 percent from the previous month.

On Thursday, the rupiah was trading at Rp 9,073 against the dollar, climbing 2 points from the previous day.

According to Bank Indonesia forecasts, the rupiah will trade at an average of Rp 9,100 against the dollar this year.

Commenting on the central bank's rate decision, Bank Mandiri economist Martin Panggabean said Bank Indonesia had room to cut its rate by 25 basis points to 7.75 percent.

He said the U.S. Federal Reserve would likely cut its rate from the current 3 percent to 2.5 percent on March 18.

The large gap between the BI and Fed rates, Martin said, would keep banks from cutting their interest rates.

High bank interest rates keep borrowers, including businesspeople, away and looking for other sources of funds, such as the capital market, to expand their businesses.

According to Bank Indonesia, the banking sector's total lending in January was Rp 1,031.1 trillion (US$113.68 billion), a 1.4 percent decrease from December last year.

The banking sector's third party funds also decreased from Rp 1,510.7 trillion in December 2007 to Rp 1,471.2 trillion in January, pushing up its loan-to-deposit ratio from 69.2 percent to 70.1 percent.

"However, the rate of non-performing loans was 4.82 percent, still below the central bank's maximum limit of 5 percent," said Bank Indonesia's director for strategic planning and human resources, Amril Arief.

Amril said the central bank's foreign reserves in the first quarter of 2008 were expected to reach $57.1 billion.

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