[Kabar-indonesia] Bank Indonesia May Cut Policy Rate to Revive Consumer Spending

[JoyoNews at aol.com]

Bank Indonesia May Cut Policy Rate to Revive Consumer Spending 

By Arijit Ghosh

Oct. 4 (Bloomberg) -- Indonesia's central bank will probably cut its 
benchmark interest rate by half a percentage point, the fifth reduction this year, to 
revive consumer spending after inflation last month slowed to a year's low. 

Bank Indonesia Governor Burhanuddin Abdullah will reduce the rate used as a 
reference for bill sales to 10.75 percent, 19 of 23 economists surveyed by 
Bloomberg said. Four expect a quarter-point reduction. The decision is due in 
Jakarta tomorrow. 

Lower borrowing costs may encourage consumers to borrow to buy homes made by 
the Ciputra Group and purchase motorbikes from Yamaha Motor Co., the world's 
second-largest motorcycle maker, after a doubling of fuel prices and a surge in 
interest rates in 2005 resulted in a spending slowdown. Further rate cuts may 
depend on Bank Indonesia's ability to keep the rupiah stable, said economists 
including Helmi Arman. 

``The first component of the economy that will rise will be consumer demand 
because it's relatively easier for banks to raise consumer lending,'' said 
Arman, an economist with PT Bahana Securities in Jakarta. ``As long as the central 
bank can lower rates without excess volatility in the exchange rate, they 
will be fine.'' 

Bank Indonesia raised borrowing costs six times in five months to December to 
12.75 percent to stem inflation after the government more than doubled fuel 
costs in October last year. 

Ciputra Group, which controls Indonesia's third-largest publicly traded 
developer, was forced to dump its yearly plan to raise housing prices by 10 percent 
in 2006 to keep customers after borrowing and other costs rose, said group 
Chairman Ciputra, who uses one name. 

Home Sales 

``Housing sales particularly outside Jakarta fell by 50 percent after the 
fuel price hike,'' Ciputra said in an interview on Sept. 27. ``As borrowing costs 
fall to 10 percent sales of homes will increase.'' 

The rupiah's trading range of 9,000 to 9,500 against the U.S. dollar will 
help boost economic growth to as much as 6.5 percent next year, Bank Indonesia 
Senior Deputy Governor Miranda Goeltom said in an interview on Sept. 20. The 
rupiah fell 0.03 percent to 9,209 against the dollar in Jakarta yesterday. 

Still, the rupiah has declined 5.1 percent since May 9, when the central bank 
started cutting interest rates, making it the second-worst performing in the 
period among 16 Asia-Pacific currencies tracked by Bloomberg. A weakening 
rupiah may force Bank Indonesia to slow the pace of its rate reductions. 

``The rupiah's volatility is creating a risk that Bank Indonesia may have to 
cut by only 25 basis points,'' said Fauzi Ichsan, chief economist at Standard 
Chartered Plc in Jakarta. The rising rupiah earlier this year made the central 
bank confident that inflation will slow, but ``now that the currency is 
fragile'' the room to cut rates is getting smaller, he said. 

Borrowing Costs 

Lower borrowing costs in Southeast Asia's largest economy may help lift 
consumer spending, which grew 2.99 percent in the second quarter, little changed 
from a 2.94 percent increase in the previous three months. 

``There aren't many reasons to be pessimistic,'' Yamaha Motor Senior Managing 
Director Tsuneji Togami said in an interview on Oct. 2. The market may 
recover next year, as prices for gasoline and raw materials will stop rising, 
reducing factors that can crimp demand, he said. 

Yamaha Motor raised its 2006 sales forecast for Indonesia by 3.2 percent to 
1.45 million units. 

Consumer prices in the $276 billion economy rose 14.6 percent in September 
after gaining 14.9 percent in August. The central bank may be emboldened by the 
slowing of inflation at the start of the Muslim fasting month in Indonesia, 
which has the world's biggest Muslim population, when food prices increase. 

Religious Festivities 

``If the government and Bank Indonesia can control inflation during the 
religious festivities, year-end inflation could reach slightly below 7 percent,'' 
Anton Gunawan, an economist at Citigroup Inc. in Jakarta said in a note 
e-mailed to investors. 

Governor Abdullah is aiming to reduce the rate used as a reference for 
central bank bill sales to 10 percent this year and to 8.5 percent by the end of 
2007 to help boost economic growth, which the International Monetary Fund 
forecasts will slow for the first time since 2001. 

The IMF expects the economy to expand 5.2 percent this year after growing 5.6 
percent in 2005. 

The following is a table of economists' estimates 
for the central bank's reference rate. 

Policy meeting                   Oct. 5

Median                           10.75%
High                               11.00%
Low                                10.75%

Number of Forecasts              23

Action Economics                 11.00%
Andalan Artha Advisindo        10.75%
Bahana Securities                10.75%
Bank Intl Indonesia                11.00%
Bank of America                   10.75%
Citigroup                              10.75%
Credit Suisse                        10.75%
Danareksa Securities             10.75%
DBS Group                           10.75%
Forecast Ltd.                        10.75%
HSBC Singapore                   10.75%
Ideaglobal                             11.00%
ING Groep NV                       10.75%
JPMorgan Chase                   10.75%
Kresna Securities                  10.75%
Lehman Brothers                   10.75%
LippoBank                            10.75%
Mandiri Securities                  10.75%
Nomura Securities                 10.75%
PT. CIMB-GK Securities         11.00%
PT. Mega Capital                   10.75%
Standard Chartered                10.75%
Westpac Banking                  10.75%

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Joyo Indonesia News Service
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