Indonesia Lowers Rate Ninth Time, More Cuts Unlikely

By Aloysius Unditu

Aug. 5 (Bloomberg) -- Indonesia’s central bank lowered interest rates for a ninth month and signaled that further cuts may be unwarranted as inflation is expected to accelerate.

Bank Indonesia reduced its reference rate by a quarter- point to 6.50 percent, according to a statement in Jakarta today. The decision was predicted by 26 of 29 economists in a Bloomberg News survey. The others expected no change.

Central banks elsewhere in Asia have stopped cutting rates and have indicated their next moves may be to increase them as the region’s economies begin to emerge from the global recession. President Susilo Bambang Yudhoyono said in his Aug. 3 budget speech that policy makers will “protect” Indonesia’s poor from inflation, which is expected to quicken to 5 percent next year.

“If the central bank is being conservative, then this month’s cut will be the last for this year,” said Purbaya Yudhi Sadewa, chief economist at PT Danareksa Sekuritas in Jakarta.

Bank Indonesia has been able to reduce its policy rate from 9.5 percent in December as inflation slows. Consumer prices rose 2.71 percent in July from a year earlier, the smallest gain since June 2000.

Lower borrowing costs are helping buoy Indonesia’s economy, which expanded 4.4 percent in the first quarter from a year earlier. Neighboring Singapore, Malaysia and Thailand all contracted in the same period as their export-dependent economies were pummeled by the worst worldwide recession since the Great Depression.

‘Even Faster’

Indonesia’s economy is expected to grow 5 percent or more next year and “even faster” in subsequent years, President Yudhoyono said in this week’s budget. Central bank Deputy Governor Hartadi Sarwono said the government’s growth estimates were “realistic.”

Growth this year is expected to be at the “upper end” of a forecast range of 3.5 percent to 4 percent, the central bank said in today’s statement. Bank Indonesia said Southeast Asia’s largest economy may expand more than previously estimated in the third quarter.

Rising domestic demand and higher global commodity prices may cause inflation pressures in 2010, the central bank said.

“In this context, monetary policy will be directed to be more anticipative of the potential inflation increase so that the inflation target of 5 percent in 2010 can be met,” it said.

Some economists say this inflation target is too optimistic and that faster consumer price gains may force Bank Indonesia to start raising interest rates early next year.

Next Move

“Consumers in Indonesia are getting more confident, growth is better than elsewhere in the region and inflation is coming down so there is no reason for rates to be cut further,” said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong. “The next move by the central bank will be a rate hike in the first quarter of 2010.”

Australia’s central bank, which kept borrowing costs unchanged yesterday, may raise its overnight cash rate target by 150 basis points from 3 percent within a year, according to a Credit Suisse Group AG index based on swaps trading. Economists expect the Reserve Bank of India to start increasing its benchmark rate by early 2010.

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