Nugroho also said that the setting of a high interest rate would only encourage the flow of foreign capital into short-term investments, such as in capital markets and deposits which are more secure, and promising high profits.
Semarang, C Java (ANTARA News) - The recent strengthening of the rupiah against the US dollar is considered timely for Bank Indonesia (Central Bank) to lower its interest rate (BI rate), an economist said here Tuesday.

"Without determining the current high BI rate that had reached 6.75 percent, the rupiah is still strengthening. At least the central bank can lower the interest benchmark rate 50 points to 6.25 percent," an economist of the Diponegoro University, Semarang, Nugroho SBM said here Tuesday.

The financial crisis that caused European and the U.S. economic slowdown has made capital flowing into Asia, including Indonesia.

Nugroho also said that the setting of a high interest rate would only encourage the flow of foreign capital into short-term investments, such as in capital markets and deposits which are more secure, and promising high profits.

"In Europe and Japan, the deposit rate could reach almost zero percent, but in Indonesia, banks provide an average of 4-5 percent per year. Higher interests with tens of billions of dollars in balance accounts," he said.

Nugroho was concerned about the capital flow into Indonesia in short term investments, such as stock markets or deposits, whereas the country requires large direct investments for the real sector to spur growth.

The real sector can grow rapidly with the support of adequate infrastructure, efficient bureaucracy, and clean governance, he said.

"One more thing, low-interest loans can also promote business competitiveness," he said.

However, Indonesia is still struggling with a chaotic infrastructure, inefficient bureaucracy, and corruption in many sectors.

These factors are considered to affect Indonesia`s competitiveness in the business world, and worsen with a high interest rate, he said.

State banks should act as pioneers to lower interest on loans if the central bank reduce its Bank certificates, based on previous experience, many state-owned banks are reluctant to cut interest rates even though BI has lowered its rates.

"State-owned banks are targeted to deposit profits in the state treasury (state budget). As long as they can still sell high-interest credits, they did not always follow reduced BI rates. They (state-owned banks) as business entities also demanded higher profits," he said.

However, the lower central bank`s benchmark rate would at least force the banks to review their current loan rates, which is about 13-14 percent per year (effective rate).(*)

Editor: Heru Purwanto
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