Bank Indonesia `Open to Possibility' of Cut in Rates

By Shamim Adam

Nov. 11 (Bloomberg) -- Indonesia's central bank is ``open'' to the possibility of reducing interest rates to boost the economy as global growth slows and inflation eases, Deputy Governor Miranda Goeltom said.

Bank Indonesia kept its key rate unchanged at 9.5 percent this month, after six increases since May, amid lower-than- expected consumer price gains. Policy makers still need to monitor inflationary pressures before making any decisions on borrowing costs, Goeltom told Bloomberg News yesterday in Sao Paulo where she attended a meeting of central bank officials.

Central banks in Asia and around the globe have slashed interest rates and governments are boosting spending as the world battles the threat of a prolonged slowdown. The International Monetary Fund last week predicted the first simultaneous recession in the U.S., Japan and euro region in the post-World War II era next year.

``We've already seen that the slowing down of the world economy and demand will eventually have an effect on our growth,'' Goeltom said. ``While the central bank is still targeting lower inflation for the future, we're not immune to the increasing need of addressing the issues of a future slowing down of productive capacities.''

Consumer prices in Indonesia increased 11.8 percent from a year earlier in October, after gaining 12.1 percent in September. The central bank expects to keep inflation between 11.5 percent and 12.5 percent this year, and for price gains to be no higher than 7.5 percent in 2009.

`Any Possibility'

Policy makers will consider ``going further than only pausing'' on interest rates as it did at its most recent meeting, Goeltom said.

``If inflationary pressures have started to go down as early indications that we have seen, we are open to any possibility of responding to it timely,'' she said. ``We don't want to be seen as over-reactive to the inflation numbers that came out this month because we have to see the longer-term picture.''

The central bank is also battling a declining currency because of a scarcity of U.S. dollars in the market. The rupiah has dropped 11.3 percent in the past month making it the worst performer among Asia's 10 most traded currencies.

``I think early in the first quarter of next year will be the right time for Bank Indonesia to cut rates given heavy pressure on the rupiah at the moment,'' said Destry Damayanti, an economist at PT Mandiri Securities in Jakarta.

Indonesia's economy may expand as little as 5 percent next year as the world tilts toward a recession, Finance Minister Sri Mulyani Indrawati said Nov. 9, adding that inflationary pressures are easing as commodity prices decline.

``It is very important to have credible decisions,'' Goeltom said. ``Credible monetary policy is even more so important when the market is so uncertain.''

To contact the reporter on this story: Shamim Adam in Sao Paulo at sadam2@bloomberg.net