BI rate rise to prevent further reversal of capital flow

Pontianak, W. Kalimantan, June 2 (Antaranews Kalbar) - A lawmaker said increase in Bank Indonesia`s benchmark rate (BI Rate) could keep the current account deficit below 3 percent as the rise in the BI rate would help stop capital outflows.

"Increase in the the BI Rate could draw the public funds and narrow down the deficit," G. Michel Jeno of the Commission XI of the Parliament from the West Kalimantan constituency said here on Saturday.

Jeno said the rise in the BI rate would draw foreign investment and in turn would prop up rupiah.

"At least foreign investors already in the country would not be encouraged to withdraw their fund to be invested abroad," he said.

He said BI rate is an instrument normally effective in reducing inflation as banks would tend to put the saving funds of their customers in Bank Indonesia rather than channeling the funds to the public in the form of credits.

The bank`s earning from interest from funds they out in the Central Bank is smaller but the risk is almost zero as the fund is guaranteed by the government, he said.

The increase in the BI rate also will have its impact on the stock market, he said, adding, funds invested in the stock market would likely be withdrawn to be reinvested in bank deposits, as the interest on which would normally rise with the increase in the BI rate.

"Therefore, the decision of Bank Indonesia to raise the BI rate is to protect the domestic economy," he said.

Earlier, the International Monetary Fund (IMF) described Bank Indonesia raising its BI rate twice in May as a right decision.

"The increase in the interest rate was a right decision to forestall risks," Director of Asia & Pacific Department of the IMF Changyong Rhee said in a statement received here on Wednesday night.

Rhee said the decision to raise the BI rate from 5.25 percent to 4.75 percent was to keep inflation under control amid the appreciation of the U.S. dollar, rise in global interest rate and oil prices.

External pressure has caused a reversal in capital flows from developing economies includi8ng Indonesia in the past several weeks, he said.

He said Indonesia is in a better position than many other countries in facing the external pressure as it has good economic resilience.

On Wednesday Bank Indonesia raised again its BI rate from 4.5 percent to 4.75 percent to cushion the impact of external pressure.

"It is a preemptive measure to keep ahead of the curve," Bank Indonesia Governor Perry Warjiyo said.