Indonesia May Lower Key Interest Rate for Second Month Running

By Aloysius Unditu and Michael Munoz

Jan. 7 (Bloomberg) -- Indonesia’s central bank will probably cut its benchmark interest rate for a second straight meeting after inflation cooled to a six-month low.

Bank Indonesia may lower its reference rate by a quarter percentage point to 9 percent, according to 14 of 16 economists in a Bloomberg News survey. The decision is due around noon in Jakarta today.

Policy makers across Asia are cutting borrowing costs to help sustain growth as the global recession reduces demand for the region’s exports. Finance Minister Sri Mulyani Indrawati expects Indonesia’s economy to expand about 5 percent this year, the weakest pace since 2002.

“The domestic economy is slowing,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “Further rate cuts are needed to bolster the growth momentum.”

Governor Boediono and his seven board colleagues unexpectedly lowered Bank Indonesia’s key rate to 9.25 percent from 9.5 percent on Dec. 4, the first cut in a year.

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.

Bank Indonesia may refrain from “aggressive” rate cuts on concern it could weaken the nation’s currency, said David E. Sumual, an economist at PT Bank Central Asia in Jakarta. The rupiah fell 13.8 percent against the dollar last year.

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 last month twice reduced domestic fuel prices.

Growth in Southeast Asia’s largest 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.

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