[Kabar-indonesia] BI Rate Likely Single Digit By End-'06

[Joyo at aol.com]

also: Indonesia c.bank cuts key rate, more seen

Bk Indonesia Rate Likely Single Digit By End-'06

By Phelim Kyne and I Made Sentana Of DOW JONES NEWSWIRES

JAKARTA,November 7 (Dow Jones)--The benchmark Bank Indonesia
one-month rate could fall under 10% next month as the
central bank stays on a monetary loosening course that saw
it cut the rate by 50 basis points Tuesday.

Analysts expect the central bank to cut its benchmark rate
by another 50 basis points in December as inflation will
likely ease further.

Bank Indonesia's Board of Governors cut the benchmark rate
to 10.25% Tuesday in a widely anticipated move that marks
the sixth reduction in rates since the current monetary
easing began in May.

The central bank also cut its overnight deposit rate, called
the Fasilitas Bank Indonesia by 50 basis points to 5.25%.

Bank Indonesia sees room for another benchmark rate cut in
December, central bank spokesman Budi Mulya told reporters,
without providing a specific forecast.

"I see another 50 basis-point cut next month which will
bring us to single digit...and then another 200-basis-point
reduction in 2007," said Tim Condon, ING economist.

Bank Indonesia Deputy Governor Aslim Tadjuddin said last
month that the benchmark one-month rate would decline to
9.00%-9.50% by end 2006 in tandem with an expected fall in
on-year inflation to 7.00%-8.00% in the same period.

The benchmark one-month rate will likely fall to 8.5% in
2007 if on-year inflation falls to the 6.5% level, Bank
Indonesia Deputy Governor Hartadi Sarwono said Thursday.

The rate cut and the likelihood of more monetary policy
easing next month is the result of a steep decline in
October on-year inflation to single digit for the first time
since September 2005 as the economy shook off the high base
effect created by a sharp spike in fuel prices in October
2005, analysts say.

Indonesia recorded 6.29% on-year inflation in October,
markedly slower than the 14.55% rate in September.

In October last year, inflation soared to 17.89% from 9.06%
the previous month after the government effectively more-
than-doubled fuel prices to slash budget-busting subsidies.

The year-on-year inflation rate at 18.38% in November, but
has steadily declined in response to monetary tightening
that began in the last half of 2005.

Rate Cuts Needed To Jump-start Econ Growth

Ongoing rate cuts are "the privilege (Bank Indonesia) gets
for successfully containing inflation and bolstering the
rupiah... and there's certainly room for another 50 basis
points (cut) in December, taking them below the magic 10.00%
level," said David Cohen, economist at Action Economics.

Cohen projected the benchmark Bank Indonesia one-month rate
will bottom at 9.00% by the end of the first quarter of
2007.

Indonesia's monetary policy loosening began in the second
half of 2005 to halt an inflationary surge and reverse a
slide of the rupiah against the U.S. dollar.

Bank Indonesia's benchmark rate cuts show how some Asian
countries are using monetary policy as an economic growth
tool rather than to tame inflation as expectations of a
global slowdown grow.

The government of President Susilo Bambang Yudhoyono has
projected economic growth of 5.8% in 2006, outpacing a 5.6%
expansion last year. The government expects gross domestic
product growth to accelerate to 6.3% in 2007.

But gross domestic product grew by only 4.97% in the first
half of 2006 from a year earlier, which likely convinced
policy-makers that they need to intensify monetary measures
in order to meet the official growth target.

Policy-makers are already expressing doubts about the
government's official GDP expansion target for 2006.

Yudhoyono and senior economic ministers last week said they
expected GDP growth of around 5.6% in 2006, which would be
the same pace as in 2005.

That pallid economic outlook makes a continuation of
monetary policy easing essential to help boost growth,
analysts say.

"Purchasing power remains weak and needs another 50 basis
points rate cut," said Winang Budoyo, Lippo Bank economist.

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Indonesia c.bank cuts key rate, more seen

By Adriana Nina Kusuma

JAKARTA, November 7 (Reuters) - Indonesia's central bank cut
its key interest rate by 50 basis points on Tuesday, the
sixth cut this year, after annual inflation plunged in
October, and said there was scope for further cuts.

Spokesman Budi Mulya told reporters the bank will remain
cautious but added: "There is still room for further BI rate
cuts."

Tuesday's rate cut to 10.25 percent was in line with
expectations and the rupiah currency <IDR=> was trading at
9,120 to the dollar at 0945 GMT, little changed from 9,123
before the announcement.

Jakarta stocks, which set record highs recently, gained
further after the cut and the Jakarta Composite Index
<.JKSE> ended up 0.8 percent, while the bond market was
steady.
"The decision was largely expected ... In fact, I'm a touch
disappointed as BI could have been a bit more aggressive and
taken a 75 basis point cut," said Singapore-based analyst
Patricia Lui of Informa GlobalMarkets.

"However, BI's more cautious approach is likely due to
increasingly narrower yield differentials. The central bank
is likely to be concerned over the impact of this,
especially with the U.S. (Federal Reserve) looking to delay
any rate cuts into the later part of Q1 2007," she added.

In a Reuters poll, 19 of 23 analysts had expected the 50
basis point cut in the BI target rate <BIPG>. Three had
expected a 75 basis point cut and one a 25 basis point
reduction.

"There are unlikely to be any large capital outflows as the
interest rate differentials with the fed funds rate still
remain wide," said Jakarta-based economist Juniman of Bank
Internasional Indonesia (BII).

"But when (the BI rate) reaches around nine percent, which I
forecast to happen in December, some hot money may flow out.
It may cause the rupiah to weaken to around 9,700 at the end
of 2006."

CAUTIOUS RATE CUTS

The central bank said its monetary policy would remain
measured, despite some suggestions it should be more
aggressive in helping to stimulate Southeast Asia's biggest
economy.

"The board of governors is of the view that monetary policy
going forward needs to remain more measured and cautious to
maintain macroeconomic stability and strengthen the momentum
for sustained economic growth," Mulya said.

The central bank has said that its key interest rate may
fall to between nine percent and 9.5 percent by the end of
the year, despite a sharp drop in inflation.

Annual inflation dropped by more than half in October to
6.29 percent from 14.55 percent in September as the impact
of a big fuel price hike in October 2005 fell out of the
calculation.

Markets fear a reversal of fund flows if interest rates are
cut too quickly. The rupiah has risen around eight percent
so far this year, supported by the relatively high interest
rates.

The BI rate jumped to 12.75 percent from 8.5 percent in the
second half of 2005 to bolster a weak rupiah and offset a
surge in inflation after the government more than doubled
fuel prices. But rates have been cut steadily this year as
inflation eased.

(Additional reporting by Johannes Mantiri and Muhammad Ari)

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Joyo Indonesia News Service
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