[Kabar-indonesia] JP: Central bank sees room for further cut in interest rate

[Joyo at aol.com]

The Jakarta Post
Saturday, August 12, 2006

Central bank sees room for further cut in interest rate

Urip Hudiono, The Jakarta Post, Jakarta

The central bank sees the possibility of further rate cuts based on a benign 
inflationary outlook after its latest half percentage point reduction in its 
key rate to 11.75 percent.

"There is still room for more rate cuts, so long as there are no major 
changes in either external or internal sentiment," Bank Indonesia Governor 
Burhanuddin Abdullah told reporters Friday.

The central bank is confident that inflation will be contained at 8 percent 
by the year's end, which would clear the way for further rate cuts, Burhanuddin 
explained.

BI's latest rate cut Tuesday came on the back of on-year inflation slowing to 
15.15 percent in July from 15.53 percent the previous month.

The central bank wants to help stimulate growth in the economy, which, due to 
recent high inflation and interest rates, slowed to a less-than-hoped-for 4.6 
percent during this year's first quarter, from 6.2 percent in the same period 
last year.

BI halted its rate cuts in June only a month after it had commenced them with 
a quarter percentage point reduction to 12.5 percent after inflation in May 
picked up slightly to 15.6 percent from April's 15.4 percent.

Prior to that, the central bank had held its key BI rate at 12.75 percent 
since December to contain inflation that surged to 17 percent in the wake of last 
year's fuel price hikes.

Burhanuddin's remarks came after BI Senior Deputy Governor Miranda S. Goeltom 
had also said that the central bank would likely continue to "aggressively" 
slash the key BI rate on the back of slowing inflation. Tuesday's half 
percentage point cut was BI's largest in the past three years.

Burhanuddin added, however, that BI would always be prudent with its rate 
policy, assessing all the relevant factors and evaluating the impact of the last 
rate cut on the economy.

BI's Board of Governors will hold its next monthly policy meeting on Sept. 5, 
after the Central Statistics Agency (BPS) releases August's inflation data. 
Meanwhile, the BPS will report on first-half economic growth on Aug. 15.

BI's most recent rate cut comes amid mixed trends in global rates, with the 
European Central Bank and the Bank of England both hiking their key rates this 
week by a quarter percentage point to 3 percent and 4.75 percent, 
respectively. The U.S. Federal Reserve and the Bank of Japan, however, held theirs steady 
at 5.25 percent and 0.25 percent, respectively.

The Fed's move greatly assisted BI in its decision to cut its rate as 
investor interest in rupiah-based assets would be unlikely to be affected, 
considering the 6.5 percentage point spread between the Fed rate and the BI benchmark 
rate. Indonesia's bond and stock markets continue to be among the world's best 
performers.

Burhanuddin said that the central bank also believed that the rupiah would 
stabilize at Rp 9,000 against the U.S. dollar by the year's end.

"The outlook is Rp 9,000, but if it strengthens or weakens, then that's just 
a part of life," he said.

The rupiah closed at Rp 9,072 per dollar on Friday, down slightly from 
Thursday's close of Rp 9,045. 

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Joyo Indonesia News Service
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