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No Signs of  ‘Overheating’ in Economy, Central Banker Says
Dion Bisara | January 13, 2012

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Bank Indonesia’s governor, Darmin Nasution, says the country’s economy remains strong and that there are no signs of “overheating,” as he tried to dismiss concern that growth was coming too quickly.

“It is difficult to say that Indonesia’s economy is overheating. If loan growth for investment rises, that’s good for the economy as it will produce goods and services,’’ the central bank head said during a press conference to announce the outcome of its monetary policy meeting on Thursday.

Bank Indonesia kept its benchmark interest rate at 6 percent for a second month, reflecting its stance on a possible acceleration in inflation this year.

The central bank had cut the rate by a total of 75 basis points in November and October to maintain growth in the economy.

It expects the economy to expand by 6.3 percent this year, slower than its original forecast of 6.7 percent growth, reflecting concerns over the debt crisis in Europe and a possible global slowdown.

Indonesia’s economy, which grew 6.1 percent in 2010, may have expanded by 6.5 percent last year. The Central Statistics Agency (BPS) is due to announce the official figure next month.

Inflation in December slowed to 3.79 percent, a 21-month low, but the central bank forecast inflation in a range of 3.5 percent to 5.5 percent for the year.

“Even if we can boost our economic growth to 7 percent, for example, that would not push the inflation rate to grow faster because the capacity of our economy is growing faster than the pace of inflation,’’ Darmin said.

In broad terms, overheating refers to a situation in which demand exceeds production capacity, and these limitations on output put a strain on growth.

Investment growth, Darmin said, is expected to balance rising domestic demand, which, in turn, would ease concerns that Indonesia’s economy is “overheating.”

Lending growth by Indonesia’s 120 commercial banks was 26 percent last year, faster than the original forecast of 24 percent. Bank Indonesia forecast lending by the banking system to increase by 27 percent this year.

Central bank data show that loans for investment grew 36 percent last year, working capital 22.2 percent and consumer loans grew by 26 percent.

Destry Damayanti, chief economist at Bank Mandiri, agreed with the central bank’s assessment that there were no signs of overheating in Indonesia.

“Indonesia’s growth is not as fast as China and India. In China, the bubble in the property sector is more obvious, a clear signal of overheating, while here the property is still far from a bubble,” she said. “Credit to this sector is still less than 10 percent.”