Indonesia Refrains From Cutting Rate as Rupiah Slides

By Aloysius Unditu and Arijit Ghosh

Nov. 6 (Bloomberg) -- Indonesia's central bank refrained from reducing its benchmark interest rate, aiming to stem an exodus of foreign investors that pushed the rupiah to its biggest drop in a decade.

Bank Indonesia kept its key rate unchanged at 9.5 percent today, after six increases since May, it said in a statement in Jakarta. The decision was expected by 15 of 23 economists surveyed by Bloomberg News. Six forecast a quarter-point rise and three predicted a cut.

Overseas ownership of Indonesian government bonds fell 16 percent as of Nov. 4 from an August record, while stocks are headed for their worst annual performance on record, as the global credit crisis prompts investors to flee from emerging markets. That contributed to a 13 percent drop in the rupiah last month and prevented Indonesia from joining Australia, China, and India in reducing borrowing costs to prop up growth.

``The rupiah is fairly weak, which suggests that you shouldn't rush into cutting rates,'' said Lim Su Sian, an economist at DBS Group Holdings Ltd. in Singapore. Still, the central bank could start reducing borrowing costs as early as next month because ``inflation is less and less of an issue and the slowdown in growth is the main story going forward.''

Weaker Currency

The rupiah fell 0.1 percent to 10,938 against the dollar in Jakarta at noon and has declined 16.5 percent in the past six months, making it the worst performing after South Korea's won among Asia's 10 most-traded currencies. Indonesia's foreign- exchange reserves declined to $50.6 billion last month, the lowest in 18 months.

Foreign holdings of Indonesian government bonds dropped to 89.7 trillion rupiah ($8.1 billion) as of Nov. 4 from 106.66 trillion rupiah in August. The Jakarta Composite index has dropped 52 percent this year.

``The chances of a global economic slowdown are getting real,'' the central bank said in today's statement. ``Bank Indonesia thinks it is important to maintain an accurate monetary policy so that it can achieve a balance between economic growth and efforts to maintain monetary stability.''

Indonesia's central bank expects economic growth to slow to 5.9 percent in the fourth quarter after an estimated 6.3 percent expansion in the three months ended Sept. 30.

Bank Indonesia may ease monetary policy in the first half of next year as Southeast Asia's biggest economy slows, Governor Boediono said Nov. 4. The central bank expects growth in the $433 billion economy to slow to between 5 percent and 6 percent next year from the fastest pace in 11 years in 2007.

Australia's central bank on Nov. 4 cut its benchmark interest rate by a larger-than-expected three quarters of a percentage point to 5.25 percent. The Reserve Bank of India on Nov. 1 lowered its key rate for the second time in two weeks, three days after the People's Bank of China cut its benchmark.

Indonesia's inflation slowed more than economists expected in October. Consumer prices increased 11.8 percent from a year earlier, after gaining 12.1 percent in September.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Aloysius Unditu in Jakarta at aunditu@bloomberg.net