Indonesia may lower interest rate, signal further cuts unlikely

06-Aug-2009 Intellasia | Bloomberg | 7:01 AM Print This Post

Indonesia’s central bank may lower its benchmark interest rate for a ninth month and signal that further cuts are unlikely as inflation is expected to accelerate.

Bank Indonesia will reduce its reference rate by a quarter- point to 6.50 percent, according to 26 of 29 economists in a Bloomberg News survey. The others expect no change. The decision is due after 11:00 a.m. today in Jakarta.

Central banks elsewhere in Asia have stopped cutting rates and have signaled their next moves may be to increase them as the region’s economies begin to emerge from the global recession. President Susilo Bambang Yudhoyono said in his August 3 budget speech that policy makers will “protect” the poor against inflation, which is expected to quicken to 5 percent next year.


“The room for interest-rate cuts is limited,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “Potential food-supply disruptions following unfavourable weather conditions and a rebound in commodity prices might trigger inflation next year.”

Bank Indonesia has reduced its policy rate by 2.75 percentage points from 9.5 percent in December to 6.75 percent last month amid slowing inflation. Consumer prices rose 2.71 percent in July from a year earlier, the smallest gain since June 2000.

Lower borrowing costs are helping buoy Southeast Asia’s largest economy, which expanded 4.4 percent in the first quarter from a year earlier. Neighbouring Singapore, Malaysia and Thailand all contracted in the same period as their export- dependent economies were pummeled by the worst worldwide recession since the Great Depression.

‘Even Faster’

Indonesia’s economy is expected to grow 5 percent or more next year and “even faster” in subsequent years, President Yudhoyono said in this week’s budget. Central bank deputy Governor Hartadi Sarwono said the government’s estimates were “realistic.”

Some economists say the government’s inflation forecast for 2010 is probably too conservative and that faster price gains may force Bank Indonesia to start raising interest rates early next year.

“With oil prices potentially increasing, it is probably safe to assume that inflationary pressures may rise next year,” said Helmi Arman, an economist at PT Bank Danamon in Jakarta. “More rate cuts now could mean we’ll see a sharper reversal of rates next year.”

Australia’s central bank, which kept borrowing costs unchanged yesterday, may raise its overnight cash rate target by 150 basis points from 3 percent within a year, according to Credit Suisse Group AG indexes based on swaps trading. Economists expect the Reserve Bank of India to start increasing its benchmark rate by early 2010.

Bank Indonesia may still decide that further rate cuts are warranted if domestic demand weakens or an expected recovery in exports falters, said Johanna Chua, head of Asian economic research at Citigroup Inc. in Hong Kong.

“We see growing risk that it could opt to cut further,” said Chua. The central bank is likely to “leave the option open for another cut.”


Category: Indonesia

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