BIZMEN URGED BANKS TO LOWER INTEREST RATES

By Andi Abdussalam

Jakarta, Dec 6 (ANTARA) - Business circles in the country now expect commercial banks to lower the interest rates on their credits in order to help stimulate the real sector.

        Businessmen voiced the expectation after Bank Indonesia (BI, the central bank) lowered its benchmark reference rate (locally known as BI Rate) by 25 basis points to 9.25 percent on Thursday, while commercial banks' interest rates still ranged at about 17 percent.

        "The lowering of the BI Rate should be responded to by banks by also reducing their interest rates and repositioning their tight liquidity," MS Hidayat, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), said at the weekend.

        The cut in the BI Rate is a positive signal for businesses and banks that the central bank is now able to control inflation and the weakening of the rupiah against the US dollar.

        BI's board of governors decided on Thursday to lower the benchmark interest rate by 25 basis points to 9.25 percent.

        In order to stimulate the real sector, BI needs to continue to lower its rate by 25 basis points in stages until it reaches 8.5 percent in the first quarter of 2009.

        The next important step is that banks need to slacken the tightness of their liquidity. This is important because it will eventually induce the real sector to move.

        According to Bank BNI chief economist Toni Prasetiantono, a lowering of the central bank's benchmark rate will loosen up banks' liquidity and energize the real sector.

        "The lowering of Bank Indonesia (BI)'s benchmark rate by 25 basis points to 9.25 percent is a good step to stimulate the real sector," he said.

        He hoped that banks would also reduce their interest rates. "We hope they will cut their interest rates, though they need time before doing so for their debtors," he said.

        The prediction that the rate of banks' non-performing loans would go down was also expected to encourage banks to channel their funds to debtors.

        Based on BI data in September 2008, commercial banks' credit provision reached Rp1,246.15 trillion while at the same time they also collected third party funds amounting to Rp1,603.45 trillion.

        Loan to deposit ratio (LDR) reached 77.72 percent or it declined from 79.02 percent in August 2008. The percentage of non-performing loans reached 3.32 percent.

        Toni Prasetiantono said the fact that the inflation rate could be controlled had given the monetary authorities a chance to lower the BI Rate.

        "Bank Indonesia was of the view that inflationary pressures began to slow down as well. It was responsive enough to voices made by parties outside the bank, and this is an encouraging one," he said.

        The Central Bureau of Statistics (BPS) has announced that the on-month inflation in November 2008 was 0.12 percent. The November inflation was lower than that in October which stood at 0.45 percent.

        The January-November 2008 inflation was recorded at 11.10 percent while the year-on-year inflation (November 2007 - November 2008) inflation stood at 11.68 percent.

        Economic observer Edwin Sinaga, however, said the BI's move to lower its rate is unlikely capable of stimulating the real sector.

        "The real sector has not yet moved due to the fact that bank interest rates are still high, namely 17 percent," Edwion Sinaga, who is also president director of PT Finance Corpindo, said here on Friday.

        Sinaga said the BI Rate should all along have been lowered because the inflation rate had begun showing a downward trend followed by a decline in international commodity prices.

        But it was still difficult to stimulate the real sector with Thursday's cut in the BI Rate. Therefore, he said, the cut in the BI Rate was expected to be followed by adjustments in the interest rates of commercial banks.

        "The banks' interest rates at 17 percent is still considered high by the business world," he added.

        Other economic observer Muhaimin Iqbal concurred with Sinaga's view. "The BI Rate cut by 25 basis points is comparable to a piece of candy which offers sweet taste for a few minutes only," Iqbal said.

        He said that the BI Rate cut could only have small effect on both macro and micro economic development in the country. It would not directly improve the economy to a significant degree.

        "The main problem is that the value of the rupiah remains too low against the US dollar," he added.

        Therefore, according to Kadin chairman Hidayat, businesspeople are now not yet willing to make new investment but committed to continuing investment plans they had made previously.

        "Investments in the gas, oil and other energy sectors are likely to go ahead until the middle of 2009 in line with previously made plans," he said.

        He expressed hope that the government would soon realize its plan to provide stimuli for the development of the production sector.

        "The government has to realize its plan to release funds to stimulate the real sector and the initiation of infrastructure projects," he said. **(T.A014/A/HAJM/A/S012) 07-12-2008 00:41:33