Optimism over an expected disbursement of a loan tranche of almost $1 billion from the International Monetary Fund, starting from Friday, and recent falls in interest rates on central bank paper (SBIs) would help push rates lower, they said.

But worries over inflation, expected to hit more than 80 per cent this year, were likely to counter any possible sharp reduction in rates.

Analysts said one of the clues that indicated interest rates would go down was the amount of funds being committed in recent weekly auctions of SBIs.

The central bank has absorbed only around half of the funds in recent SBI auctions, and the remaining funds were likely to be back mostly in the hands of commercial banks, analysts said.

For the commercial banks, keeping the funds would be costly asnot many firms would be interested in obtaining loans with lending rates of more than 70 per cent, said banking analyst Joshua Tanja of Paribas Asia equity.

"With trillions of rupiah failing to get into the SBI auction, the bankers may be inclined to lower the lending rates to make it more attractive for companies," said another banking analyst with a foreign brokerage.

Bank Indonesia's weekly auction of SBI certificates on Wednesday resulted in an absorption of 11.5 trillion rupiah ($1.04 billion) at a weighted average interest rate of 67.43 per cent.

The amount accounted for only 50.72 per cent of incoming bids. The central bank had targeted mopping up 11.0 trillion rupiah with its one-month paper.

Analysts said optimism over the expected disbursement of nearly $1 billion from the IMF was also likely to have a positive impact on government efforts to reduce rates.

"The government may use the funds from the IMF to sell dollars and buy rupiah in the domestic market, which should boost the rupiah.With a stronger rupiah, there would be more room for efforts to reduce rates," the foreign brokerage analyst said.

But he added that the exchange rate was determined as much by political factors as interest rates in Indonesia's volatile environment.

The analyst said net domestic assets would expand by some 17 trillion rupiah from September to December, based on government monetary targets agreed with the IMF.

"It shows that the current very tight liquidity would be slightly eased by then," the analyst said.