Indonesia May Cut Rate for a Seventh Month to Bolster Growth

By Aloysius Unditu and Michael J. Munoz

June 3 (Bloomberg) -- Indonesia’s central bank will probably cut its benchmark interest rate for a seventh straight month to help boost economic growth.

Bank Indonesia will reduce its reference rate by a quarter- point to 7 percent, the lowest level since the benchmark was introduced in 2005, according to 18 of 19 economists in a Bloomberg News survey. The decision is due in Jakarta today.

Policy makers across Asia have cut borrowing costs and increased spending to counter the worst global recession since the Great Depression. Bank Indonesia may need to reduce its key rate further as commercial lenders have been slow to follow the central bank’s lead and lower rates for consumers and companies.

“Banks have been reluctant to pass on rate cuts,” said James Lord, an economist at Capital Economics Ltd. in London. “Falls in the policy rate will therefore be necessary for lending rates to ease further and support economic activity.”

Indonesia’s central bank has reduced its policy rate by 2.25 percentage points from 9.5 percent in December. The base lending rate, an indicator for banks to set their own lending rates, has declined to 16.40 percent as of yesterday, from 16.67 percent on Dec. 4, when then Governor Boediono first cut the benchmark.

Bank Indonesia has been able to reduce interest rates as inflation has slowed. Consumer prices rose 6 percent last month from a year earlier, the smallest increase in 23 months, according to a June 1 government report.

‘Bright Spot’

Still, the central bank may pause after today’s monetary policy decision amid signs the global economy may be recovering, said economists including DBS Group Holdings Ltd.’s Lim Su Sian and Prakriti Sofat from HSBC Holdings Plc.

Indonesia has also been less affected than its neighbors by the global slump as it isn’t as reliant on exports. The $433 billion economy expanded 4.4 percent in the three months to March 31 from a year earlier, the fastest pace in Southeast Asia.

“As the downturn takes its toll on the world’s leading economies and on much of the region, Indonesia has emerged as a bright spot on the regional growth map,” said Stephen Schwartz, an economist at Merrill Lynch & Co. in Hong Kong. “The global economic turmoil has not been as severe as anticipated and prospects for the remainder of the year are relatively strong.”

Bank Indonesia predicts the economy will expand at the higher end of its 3.5 percent to 4.5 percent target this year, senior deputy governor Miranda Goeltom said on June 1. Growth in 2010 may be between 4 percent and 5 percent, she said.

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