BI RATE

BI caps 2006 interest rate at 9.75 percent

Urip Hudiono, The Jakarta Post, Jakarta

Indonesia is likely to see higher growth next year on better macroeconomic indicators, with the central bank wrapping up 2006 with a final rate cut in line with the recent slowdown in inflation.
At its monthly policy meeting Tuesday, Bank Indonesia's Board of Governors trimmed its key interest rate by half a percentage point to 9.75 percent, the fifth cut of this size since August, following two quarter-point shaves in May and July.
This sees both inflation and interest rates back at single-digit levels, which is expected to help boost the country's US$266 billion economy on the back of higher consumer spending and investment ahead.
Inflation in the year to the end of November continued to slow to 5.27 percent, the Central Statistics Agency (BPS) recently reported, after soaring in the first months of the year following the fuel price hikes at the end of 2005.
In the wake of the hikes, the central bank had raised its benchmark BI rate -- which is used as a reference for bank lending rates and bill sales -- by December last year to 12.75 percent to help stave off inflation.
As a result of the twin evils of high inflation and interest rates, growth in the country's consumption-driven economy slumped to only 4.7 percent during 2006's first quarter, before rebounding to 5.08 percent and 5.52 percent in the second and third quarters, respectively.
While growth may miss its 5.8 percent target for this year, analysts say, ending up at around last year's level of 5.6 percent, the government expects it to accelerate to 6.3 percent in 2007.
The central bank hopes that Thursday's rate cut will spur more growth and help to improve the country's business climate while at the same time maintaining stability in the financial markets.
"BI's recent rate-cut policy has so far received a positive response from both the financial markets and the real sector," its Board of Governors said in a statement announcing the latest rate cut.
"Consumer confidence and optimism among producers is up, and is being translated into higher production and spending. Businesses will also be able to seek cheaper financing from outside the banking sector."
BI said that Indonesia's banking sector had expanded lending by Rp 66 trillion ($7.2 billion) by the end of October, or a 9 percent increase up to that date, although this was still short of the targeted 13-15 percent credit growth for this year.
The Jakarta Stock Exchange closed 0.13 percent down at 1,782.116 following the rate cut, while the rupiah closed 0.33 percent up at Rp 9,085 against the U.S. dollar.
Lower rates should help the prospects of publicly listed companies, but could also cut into the yields of rupiah-based assets, thereby affecting investor interest. Meanwhile, BI said it believed that the rupiah would average Rp 9,138 per dollar by the end of November.
For 2007, the central bank is maintaining its inflation forecast at 6 percent, plus or minus 1 percent, and the BI rate at 8.5 percent.
Inflation trend (%, yoy): BI rate trend (%):
January............17.03% Jan. 9......12.75% February...........17.92% Feb. 7......12.75% March..............15.74% March 7.....12.75% April..............15.40% April 5.....12.75% May................15.60% May 9.......12.50% June...............15.53% June 6......12.50% July...............15.15% July 6......12.25% August.............14.90% Aug. 8......11.75% September..........14.55% Sept. 5.....11.25% October.............6.29% Oct. 5......10.75% November............5.27% Nov. 7......10.25%
Dec. 7.......9.75%
Source: BPS Source: BI