Indonesia Cuts Interest Rate by Surprise Half Point

By Aloysius Unditu

Jan. 7 (Bloomberg) -- Indonesia’s central bank cut its benchmark interest rate by a “surprise” half point to boost growth, and trimmed its inflation forecast after consumer prices rose the least in six months.

Governor Boediono and his seven colleagues lowered the key rate to 8.75 percent from 9.25 percent. The magnitude of the reduction, the steepest since December 2006, was predicted by just one of 16 economists in a Bloomberg News survey.

Bank Indonesia had refrained from joining the region’s central banks in reducing rates until last month on concern a cut would push the rupiah lower and spook foreign investors. Since the Dec. 4 action, the currency has rebounded to what Finance Minister Sri Mulyani Indrawati says is a “comfortable” level for Southeast Asia’s largest economy.

“The scale of the move probably indicates that the central bank is becoming increasingly concerned about Indonesia’s growth prospects, while inflation is taking a backseat,” said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. The “surprise move” was aided by a stable currency, which “helped create the right environment,” she said.

The rupiah has strengthened 10.4 percent since last month’s quarter-point reduction in the policy rate to 9.25 percent. The Indonesian currency pared gains after today’s decision, trading at 10,950 against the dollar from 10,880 before the rate cut.

‘Balance of Risk’

Indonesia’s benchmark stock index was 2.4 percent higher at 1:32 p.m. in Jakarta.

“The balance of risk this year requires our monetary stance to give more attention to boosting economic growth, while at the same time control inflation and financial stability in the medium term,” Boediono said at a briefing in Jakarta today.

The reduction in borrowing costs may not stop sales at carmakers including Toyota Motor Corp.’s local unit from falling.

The Indonesian Automotive Industries Association forecasts total car sales to decline by a quarter to 450,000 units this year from a record in 2008, Bambang Trisulo, chairman of the association, said in an interview in Jakarta today.

The Reserve Bank of India on Jan. 2 reduced its repurchase rate to 5.5 percent from 6.5 percent and the reverse-repurchase rate to 4 percent from 5 percent. Bangko Sentral ng Pilipinas cut its benchmark interest rate in December for the first time in 11 months.

Stimulus Package

Slower inflation has given Indonesia’s central bank scope to trim borrowing costs. Consumer prices rose 11.1 percent in December from a year earlier, after the government twice reduced domestic fuel prices that month.

Inflation is expected to ease to between 5 percent and 7 percent this year, Boediono told reporters in Jakarta today. That’s less than the central bank’s previous forecast of 6.5 percent to 7.5 percent.

Growth in the $433 billion economy may be aided by a government stimulus package and election-year spending, Sri Mulyani said in a Bloomberg News interview yesterday.

President Susilo Bambang Yudhoyono, who is eligible for re -election this year, this week announced plans to spend an extra 50 trillion rupiah ($4.5 billion) to help sustain growth as exports slow.

Growth in Indonesia’s exports, excluding oil and gas, may weaken to less than a quarter of last year’s pace, Trade Minister Mari Pangestu said yesterday. Export growth may range between 4.3 percent and 8 percent this year, compared with 18 percent last year, she said.

Lending Growth

Overseas sales of Indonesian goods fell 2 percent to $9.61 billion in November, the first monthly decline since March 2004, the Central Statistics Bureau said on Jan. 5.

“With external demand likely to remain weak, strength in domestic demand would remain crucial to avert a significant slowdown in the domestic economy,” Kit Wei Zheng, an economist with Citigroup Inc. said in a note to clients. “We expect Bank Indonesia to maintain an accommodative monetary policy stance going forward to cushion domestic spending.”

Bank Indonesia forecasts lending growth to slow to 18 percent this year, from 30.2 percent in 2008. The central bank also expects economic growth to ease to between 4 percent and 5 percent this year. Boediono yesterday said growth may exceed 5 percent on the government’s fiscal stimulus plan.

Today’s rate reduction shows Bank Indonesia wants commercial banks “to follow suit with shorter lags and with greater magnitude in terms of their loan interest rates to shore up domestic business,” said Enrico Tanuwidjaja, an economist at Oversea-Chinese Banking Corp. in Singapore. Last month’s cut was “just the beginning of their monetary policy easing cycle.”

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