BI GIVING CAUTIOUS RESPONSE TO LOWER INFLATION RATE

By Andi Abdussalam

       Jakarta, Nov 5 (ANTARA) - Bank Indonesia (BI/the central bank) is giving cautious response to calls that it should lower its present 9.5 percent benchmark interest rate as inflation has dropped in October to 0.45 percent.

        "It seems that inflation will be lower in the coming months. The low inflation in October is encouraging but a close observation must be made. Of course, BI will respond to it," BI Senior Deputy Governor Miranda S Goeltom said.

        She said that BI would pay close attention to the downturn of the inflation which dropped to 0.45 percent in October from 0.97 percent in the previous month.

        "If low inflation continues we can conclude that pressures have declined. It should be kept in mind, however, that one-month inflation rate cannot represent its rate for the whole months of the year," the BI senior deputy governor said.

        Following the inflation decline in October, business players called on the central bank to lower its reference rate in order to provide businesses with access to capital and to move the wheel of the real sector.

        Research analyst of PT Sinarmas Sekuritas, Alfiansyah, said Bank Indonesia should take the October inflation rate into consideration to lower its key rate so that the distribution of bank credits could be normalized and the real sector could be activated.

        The Central Bureau of Statistics (BPS) announced on Monday the October inflation rate had dropped to 0.45 percent from 0.97 percent in the preceding month.

        The rate of inflation from January to October meanwhile was recorded at 10.96 percent and year-on-year inflation at 11.77 percent.

        Deputy Chairman of the Indonesian Chamber of Commerce and Industry (Kadin) for taxation and fiscal system Haryadi Sukamdani said now was the time for Bank Indonesia to lower its benchmark interest rate from 9.5 percent to 6-8 percent.

        "We are calling on BI to cut its interest reference rate. It should be lowered again to the 6-8 level. I don't know how BI will do it but an interest rate of over 9 percent is not good," Sukamdani said.

        He said that banks now should take relaxation steps owing to the fact that BI had successfully overcome the liquidity problem by issuing a short-term funding facility (FPJP) regulation.

        "Banks should take a relaxation step because a high interest rate would endanger the real sector if they continue to maintain a high rate," he said.

        Last week, young Indonesian businessmen also called the central bank to cut its benchmark interest rate by at least 50 basis points in the next two months.

        The cut in the key rate, locally known as BI Rate, would stimulate banks to lower their lending rates by 2-3 percent, Chairman of the Young Indonesian Businessmen Association (HIPMI) Erwin Aksa said over the weekend.

        "Hopefully, the cut in the key rate will give the business world access to capital and banks will no longer be afraid of non-performing loans," he said.

        He said BI Rate which currently stood at 9.50 percent was too high, depriving the business world of access to low interest credits to finance their businesses.

        In the meantime, Chief economist of Standard Chartered Bank (SCB), Fauzi Ichsan, predicted that Bank Indonesia will not cut its benchmark rate in the near future although the inflation rate last October had dropped to below the September 2008 figure.

        "The central bank usually lowers its reference rate three months after bank interest rates have increased. BI raised its benchmark only last month. So, for the time being it will be difficult for the bank to lower the benchmark rate now. Moreover, the rupiah's exchange rate is still unstable," Fauzi Ichsan said.

        Fauzi Ichsan said that other countries like the United States and European countries had begun lowering their interest rates because they were experiencing a condition of economic recession. Indonesia could not do that because it was experiencing a recession.

        "Indonesia is not experiencing a recession. Its inflation rate is still a double-digit figure while the rupiah's exchange rate is still unstable. If the rupiah continues to plunge it will fuel inflation due to imported inflation," the SCB economist said.

        He said that though the inflation rate has dropped in October, it had not yet reached the expected level.

        "We predict that BI will maintain its rate now or even raise it by 25 basis points. It is unlikely for it to lower its reference interest rate now," he added.

        Yet, BI would take into account inflationary pressures to respond to calls for lowering of its benchmark rate.

        "We need more data on the inflation developments," Miranda S Goeltom said.

        The central bank senior deputy governor, however, expressed optimism that inflation in the country would be more controllable in the coming months because global inflation was now experiencing a downward trend.

        "It seems global inflation is showing a downturn trend which means that global pressures are also decreasing. We hope that inflation will also be declining in the future," she said.  (T.A014/A/O001/A/O001) 05-11-2008 09:55:08