Bank Indonesia may cut interest rates

The currency is up about 15% since late last week

Indonesia's central bank has indicated that it may cut interest rates to ease the country's debt repayment, if the currency continues to strengthen.

The rupiah has increased in value by more than 10% since early Monday as financial markets reacted positively to the appointment of new president Megawati Sukarnoputri.

A stronger currency will "reduce the pressure on us to maintain a relatively tight monetary policy, so there is room in the future for us to get interest rates down," said deputy governor Achjar Iljas.

The central bank has raised interest rates six times this year.

The rate rises have increased the amount of interest the government has had to pay on its debts.

Debt bigger than GDP

At $135bn, government debt is equal to 110% of gross domestic product, said Ferry Hartoyo of Vickers Ballas Investment Research in Jakarta.

"This strengthening of the rupiah, it also means less pressure on inflation", the deputy governor said.

Only last week, the central bank warned that its inflation target for 2001 would be breached as prices at the end of June were 3.28% higher than at the end of March.

Financial markets optimistic

The mood in Jakarta's financial markets remained positive on Tuesday as traders waited for the new president to appoint her cabinet.

The rupiah ended the day's trade at 9,825-9,900 to the US dollar, having breached the 10,000 level for the first time since March.

We are optimistic of Megawati. I think the economy can't get any worse

David Chang, Vickers Ballas Securities

The Jakarta Stock Exchange failed to repeat Monday's rise, which took it to a 10-month high, and ended the day down 2.6% at 457.918.

Dealers attributed the fall to profit-taking. After sharp gains the previous day, foreign fund managers sold stocks to lock in their gains, said Roy Santoso of Kim Eng Securities in Jakarta.

Currency surge

The surge in the currency began ahead of Ms Sukarnoputri's swearing in as president to replace the former president Abdurrahman Wahid, whose earlier declaration of a state of emergency was rejected by the legislature.

The rupiah's strengthening reverses the trend of recent months. Bank Indonesia said late last week the rupiah had devalued by 13.4% in the April-to-June period.

The bank said the currency's previous fall in value was partly due to Indonesians buying foreign currency as a buffer against political unrest.

"We are optimistic of Megawati. I think the economy can't get any worse and I believe Megawati will be a more effective president," said David Chang, an analyst with Vickers Ballas Securities.