Indonesia Cuts Rate for Third Month to Spur Growth

By Aloysius Unditu

Feb. 4 (Bloomberg) -- Indonesia’s central bank lowered its benchmark interest rate for a third straight month to cushion Southeast Asia’s biggest economy from the global recession.

Governor Boediono and his seven colleagues cut the key rate to 8.25 percent from 8.75 percent, according to a statement on Bank Indonesia’s Web site today. The decision was predicted by 20 of 23 economists in a Bloomberg News survey.

Policy makers across Asia have slashed borrowing costs as demand for the region’s exports plummet amid the global slump. Bank Indonesia, which reduced its key rate after inflation eased to a nine-month low and exports plunged, said the world economy had become “gloomier” in recent months.

“Inflation is clearly no longer an issue,” said Lim Su Sian, an economist at DBS Group Holdings Ltd. in Singapore. “More significantly, the domestic economy needs all the support it can get, with trade data pointing to rapidly deteriorating external demand.”

The rupiah increased 0.3 percent to 11,690 against the dollar at 9:49 a.m. in Jakarta following the central bank’s second consecutive half-point cut. The benchmark stock index rose 0.5 percent.

Consumer prices in Indonesia rose 9.2 percent in January from a year earlier, after increasing 11.1 percent in the previous month. Exports dropped 20 percent in December from a year earlier, the biggest decline since 2001.

‘Gloomier’ Outlook

Sluggish overseas demand is crimping Indonesia’s economic expansion. The central bank expects growth to weaken to as little as 4 percent this year, the slowest pace since 2001, from an estimated 6.1 percent in 2008.

“Several indicators show that the global economy is gloomier than estimated several months ago,” the central bank said in today’s statement. “The impact is being felt in the nation, particularly in sectors related to foreign trade.”

Growth may remain subdued unless commercial lenders are prepared to pass on the central bank’s cuts to their borrowers, said economists including Enrico Tanuwidjaja.

A half-point cut “is an important signal to the banking sector to ease borrowing costs in order to stimulate domestic business activities,” said Tanuwidjaja from Oversea-Chinese Banking Corp. in Singapore.

Bank Indonesia has reduced its policy rate by 1.25 percentage points to an eight-month low since December, while commercial banks have lowered the overnight base lending rate to 16.44 percent from 16.47 percent in the same period, according to central bank data.

Liquidity Management

“Bank Indonesia will take the necessary measures to strengthen the Indonesian banking sector, including the necessary liquidity management,” the central bank said.

The rate cut in Indonesia follows the Reserve Bank of Australia’s decision yesterday to reduce borrowing costs by one percentage point to the lowest level since 1964.

The Philippine central bank lowered its benchmark rate for the second time in six weeks on Jan. 29, cutting the overnight deposits rate to 5 percent from 5.5 percent.

Malaysia’s central bank cut its key rate by the most in more than a decade on Jan. 21, reducing its overnight policy rate by three-quarters of a percentage point to 2.5 percent.

Indonesia forecasts inflation will slow to between 5 percent and 6 percent by August, Finance Minister Sri Mulyani Indrawati said on Feb. 2. To boost growth in the $433 billion economy, the government plans to spend 71.3 trillion rupiah ($6.1 billion) this year, Sri Mulyani said.

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