Indonesia Has Limited Room on Rates After Eighth Cut

By Aloysius Unditu and Yoga Rusmana

July 3 (Bloomberg) -- Indonesia’s central bank said room for reducing borrowing costs further is “limited” after cutting its benchmark interest rate for an eighth straight month.

Bank Indonesia lowered its reference rate by a quarter of a percentage point to 6.75 percent, acting Governor Miranda Goeltom said at a briefing in Jakarta today. The reduction was predicted by 18 of 23 economists in a Bloomberg News survey. The other five expected borrowing costs to be kept unchanged.

The central bank may be near the end of its cycle of rate cuts as inflation is set to accelerate in the coming months, economists including Destry Damayanti say. Asian policy makers, who have slashed borrowing costs and pledged more than $950 billion of stimulus plans, have started saying their economies could be past the worst of the global slump.

“We don’t expect many rate cuts ahead as inflation tends to increase in the second half,” said Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “The current inflation level is nearing its bottom and is likely to increase by the end of the year due to religious festivities.”

The rupiah rose 0.2 percent to 10,205 against the dollar at 2:14 p.m. in Jakarta. The benchmark stock index fell 0.1 percent.

Southeast Asia’s largest economy may stop cutting interest rates as a credit crunch in the nation’s banking system has been resolved, the Paris-based Organization for Economic Cooperation and Development said June 24.

‘Getting Limited’

Indonesia’s improving economic outlook has pushed it out of the world’s 10 riskiest issuers of sovereign bonds, according to credit-default swap prices from Credit Market Analysis.

Monetary policy will be directed toward “maintaining macroeconomic and financial system stability,” Bank Indonesia said in a statement. “With this consideration, monetary policy will be done more carefully considering that the room for monetary easing is getting limited.”

Consumer prices rose 3.65 percent in June from a year earlier, the statistics office said on July 1. That was the smallest increase since June 2000 and less than the 3.85 percent median forecast in a Bloomberg News survey of 20 economists.

Bank Indonesia is “confident” inflation will be below 5 percent this year, Goeltom said today. The central bank is monitoring inflationary pressures that may appear as commodity prices increase next year, she added.

Faster Growth

Bank Indonesia cut the policy rate “using the lower inflation print and relative stability in the currency as an opportunity to take out further insurance on growth,” said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. The central bank will likely cut rates by another quarter point “with 6.5 percent marking the bottom in rates,” she added.

Indonesia’s economy is forecast to expand 4.6 percent in the second half of this year from an estimated 4.1 percent in the first six months, Finance Minister Sri Mulyani Indrawati said June 30. The economy may expand 4.3 percent this year, helped by domestic consumption, Sri Mulyani said.

Bank lending has expanded 15 percent this year and will be able to support economic growth, Goeltom said.

Indonesia has been less affected than its neighbors by the worst worldwide recession since the Great Depression 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.

The OECD predicts Indonesia’s economy will expand by 3.5 percent this year. Bank Indonesia’s forecast is between 3 percent and 4 percent. The economy expanded 6.1 percent in 2008.

Bank Indonesia has cut its policy rate by 2.75 percentage points from 9.5 percent in December amid slowing inflation.

To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net; To contact the reporter on this story: Yoga Rusmana in Jakarta at yrusmana@bloomberg.net