Interest Rates & Capital Flight

Sep 15th, 2006, in Business & Economy, by

Bank Indonesia might provoke a monetary crisis should it lower interest rates below 10%, says an analyst.

Andy Xie of Morgan Stanley Asia Pacific says too-low interest rates would spark capital flight and plunge the country into crisis.

Indonesia could experience another monetary crisis.

He advises that the urge to lower rates to encourage growth should be tempered with the knowledge that monetary policy has only limited uses and may not be able to solve many of an economy’s more deep-seated problems. Should interest rates fall sharply he says:

The rupiah will collapse and inflation will explode.

At the moment, he says, much of the capital coming into Indonesia is of a flighty nature, controlled by hedgefund managers, who

They are traders who can change their minds easily.

Indonesia’s real problem, he says, is not high borrowing costs but the low level of investment, both foreign and local.

The most important thing is for the government to be able to re-establish trust in investing here.
Paling penting bagaimana pemerintah dapat mengembalikan kepercayaan berinvestasi di sini.

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