TO REVITALIZE THE HIGH BANK INTEREST REGIME

Meeting of the Board of Bank Indonesia Governors sometime ago decided to maintain BI benchmark rate at 7.5%, with lending facility 7.5% and deposit facility 5.75%. In response to BI’s decision, businesspeople were expecting BI could lower their interest rate, considering that Indonesia’s economy today was notably stable.

In response to the above, one of BI Board of Governor member explained that BI’s decision to increase interest rate by 175 basic points since June 2013 last was a policy intended to stabilize economy, which was why BI would continue to play their role to secure monetary stability.

He said that the key solution was economic and monetary stability. If BI rate today made monetary situation stable then it would be maintained. BI’s objective to increase benchmark rate to 175 bps last year was to stabilize monetary condition.

It was advisable for BI to observe the trend of benchmark rate stipulation in developing countries. To illustrate, Asian countries dared to set low interest, although Tappering Off by the Fed in the USA continued. Supposedly Indonesia followed their steps as low bank interest tend to spur on economic growth. In Southeast Asia, Indonesia’s benchmark rate was the second highest next to Vietnam.

As reference, Governor of Korea’s Central Bank, Lee Ju-Jeol, last week decided to set benchmark rate at 2.5% this stable interest rate lasted for 11 consecutive months, in spite of pressures from inflation. Furthermore the Central Bank of the Philippines was still maintaining benchmark rate at 3.5%, which was the lowest interest level in the history of the Philippines and had been maintained since October 2012.

Strangely, the condition was different in Indonesia. BI continued to maintain BI Benchmark rate at high level: 7.5% since November 2013. Businesspeople screamed for help. They said that high BI rate made it hard to businesspeople to expand business. With BI rate at the level, credit interest in banks might be as high as 2 digits [above 10%] per year. So production cost soared high and so were prices of goods. The “Love local products” campaign got stuck.

According to businessplayers, with inflation cooling down and forex reserves posted at above USD 100 billion and trade balance at surplus, supposedly BI lowered benchmark rate. Moreover, soon the Asia Free market would be in effect [AEC 2015]. Businesspeople needed low interest credit in order to be globally competitive.

A high ranking BI official signaled that BI rate would never go as low as 4% in yearly inflation had not reached 2%. He said that BI rate must be maintained at the present level to attract foreign capital such was because Indonesia still needed foreign capital to propel economic growth.

The role of overseas fund at the financial market could serve as solution as financing capacity of the banking sector was limited. Bank’s financing was dominated by short term financing, which made it hard to support infra structure building. As long as inflation was in the range of 6% per year benchmark rate would remain hard. To tame inflation, the Government must eliminate oil subsidy and that would mean a hard dilema.

In the end, BI persisted to adopt tight monetary policy by setting bank interest at 7.5%. Benchmark rate would be hard to reduce in anticipation of the Fed executing Tappering Off.

If the Fed’s interest were increased to 1% in June 2015, at least in the next one or two years Indonesia’s benchmark rate needed not to be axed. BI would anticipate the risk of outgoing capital which might happen if the Fed’s interest were increased. Besides, the benchmark rate retained at 7.5% for a year or to was to anticipate increase of oil price.

It was predicted there would be increase of subsidized oil price, during the present or the next Government, resulting in high inflation. In increase of oil price happened this year, inflation could soar up to around 6% - 7%. In the negative case inflation could be suppressed to 5%. These were the argument for BI to maintain BI rate at 7.5%.

In that case, bank’s credit interest would be in the range of around 10% - 13% per year for all types of credit. The only thing was that if banks were able to suppress cost to enhance operational efficiency, there would be chance for credit interest rate to drop to 9% - 12% year. Good news for businesspeople.

Even if BI wished to maintain BI rate at 7.5%, the most important thing was that credit interest at home would go down in line with inflation. In that case, tight money policy was more aimed at monetary stabilization for contracting deficit in current transaction which had positive impact on easing inflation. (SS)

Business New - April 25, 2014