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BI May Reduce Rate Again, Nomura Says
February 03, 2012

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The central bank may cut its key interest rate further on the back of slowing inflation and strong economic growth, Nomura Research Institute says.

“We reiterate our out-of-consensus call that Bank Indonesia will reduce the policy rate by 25 bp [basis points] to 5.75 percent,” Euben Paracuelles, an economist with Nomura who is based in Singapore, said in a report.

Inflation in January eased to 3.65 percent year-on-year from 3.79 percent in December, the Central Statistics Agency (BPS) reported on Wednesday.

“By our forecasts, it is possible that the headline consumer price index could move closer to the low-end of the target [3.5 percent to 5.5 percent], if not below it, over the next two months,” Paracuelles said, as demand shows signs of softening and also as an effect of a high base.

Still, he said the 150 basis-point rate cut that Nomura predicted for the first half of this year was becoming more unlikely.

“The key consideration for further easing will be the inflation outlook, and in this context the risk mainly comes from potential changes to the fuel subsidy policy,” he said.

The electricity rate increase of 10 percent, which was implied in the 2012 budget, and the plan to ban private cars from using subsidized fuel will likely be implemented in April, Paracuelles said.

These policies should still keep headline inflation within the central bank’s target, he said.

With the higher power rate and new fuel policy, inflation could reach 5.3 percent this year, compared to the upper range of Bank Indonesia’s estimate, 5.5 percent. Francezka Nangoy