By Andi Abdussalam
Jakarta, Jan 8 (ANTARA) - Bank Indonesia (BI/the central bank)'s move to cut its benchmark interest rate by 50 basis points to 8.75 percent on Wednesday was seen as a positive step but analysts said it was not enough to stimulate the real sector.
"I think it is good. It will revive domestic and foreign investors' confidence in investing their money, particularly in the SUN market," Rahmat Waluyanto, director general for debt management of the Ministry of Finance, said.
However, an economic analyst said that in order to boost the real sector the central bank should lower its rate, locally known as BI Rate, and maintain it at 8 percent.
"To propel the industrial sector, the BI Rate should be lowered to and remain at eight percent," Rully Nova, an economic analyst with PT Bank Himpunan Saudara Tbk said.
According to Rahmat Waluyanto, the lowering of the BI Rate from 9.25 percent to 8.75 percent would have a positive impact, particularly on the state debenture (SUN) market.
The interest rate cut is one of the factors that could revive investors' confidence following the downward trend and more controllable inflation rate.
Waluyanto said that other confidence triggers included interest rate margin between interest at home and abroad (The Fed Fund) which was still profitable for investors.
"A stable and strengthening of the rupiah's exchange rate will create positive sentiment for investors, foreign ones in particular," he said.
There has been an increasing trend in the ownership of SUN by foreign investors in the last several weeks.
"Previously, SUN ownership by foreign investors was about 16.2 percent of the total SUN values and it is now increased to 16.8 percent, Waluyanto said.
It seems however that in term of real sector development, the lowering of the BI Rate by 50 basis points on Wednesday is considered not yet enough.
In Nova's view, a BI rate reduction from 9.25 percent at present to nine percent would not be enough to move the industrial sector. To propel the industrial sector, the BI Rate should be lowered to and remain at eight percent.
Sustained efforts would be needed to make a BI Rate at 8 percent possible. This is urgent because a revival in the industrial sector would not be accompanied by a proportionate surge in the investment sector which in fact would decline due to the present global crisis.
The cut in BI Rate, if followed by reduction in commercial bank interest rates, will however encourage companies to ask for more banking credits to restart their halted real sector business.
When the BI Rate continued to decline, commercial interest rates in the market would go down as well, Nova said.
Commercial banks have so far not lowered their interest rates because they are waiting for market developments which until now are marked by a downturn in customers' applications for credit, he said.
"We predict the national economy will grow well and eventually enable the rupiah to strengthen to Rp10,000 from Rp10,800 per US dollar now," Nova said.
The rupiah's exchange rate would continue to improve if BI supervised the foreign currency dealings of foreign banks more tightly.
In the meantime, Retail Banking Director of PT Bank Mega, Kostaman Thayid said the lowering of the BI Rate by 50 basis points would send a signal to the public that the banking sector would also cut their interest rates.
He warned however that the cuts in the commercial banks' interest rates could be hampered due to uneven banks liquidity and high loan to deposit ratio (LDR) requirement.
"Banks will first overcome their liquidity and LDR problems before they decide to lower interest rates," he said adding that the BI step will at least give a signal to the public that banks will soon adjust themselves to the market.
He suggested that state-owned banks take the lead in lowering interest rates so that private banks would follow suit.
In the meantime, Chaterina Hadiman of PT Bank CIMB-Niaga said the BI Rate cut indicated banks interest rates now had reached their peaks, sending a signal to the public that interest rates would soon go down.
The problem now is whether the banking sector will soon give response to the BI Rate cut or not due to various problems that have to be overcome first such as uneven liquidity and the impacts of world economic slowdown.
On Wednesday, BI cut its benchmark interest rate by 50 basis points to 8.75 percent. BI Governor Boediono told a press conference that the central bank took the decision after it evaluated the current economic and monetary conditions at home and overseas.
"The risk considerations in 2009 require us to take monetary polices which support economic growth while keeping inflation and stability for the financial sector for the middle term," he said.
He said that the BI Rate cut was effected after seeing the downward trend in inflationary pressures at home due the decline in world demand for commodities, food and energy and the slowing down of aggregate demand.
"Deflation by 0.04 percent happened in December 2008 so that the inflation rate of 11.06 percent was also one of the factors for BI to lower its rate," Boediono said.
He was even convinced that economic conditions in 2009 would be better than in 2008. "I feel that things in 2009 will be better," he added. (T.A014/A/HAJM/16:25/a014) 08-01-2009 16:41:27
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