•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   

Bank Indonesia is expected to cut its benchmark rate again today to a record low of 6.5 percent after year-over-year inflation slowed to a nine-year low last month, but it will likely be the last cut this year, local and foreign economists said.

Analysts forecast that the central bank would trim another 25 basis points from the record low BI rate of 6.75 percent. The bank has slashed the key rate 275 basis points since December in a bid to push commercial banks to lower lending rates and stimulate the economy.

But analysts said the rate cut today — if it materializes — would likely be the last of the year, and perhaps for much longer, because of worries about inflation in 2010 driven by a possible rise in global commodity prices.

They said further rate cuts would certainly be ruled out if the government decided to raise fuel prices in line with international increases, as it has in previous years.

Eric Alexander Sugandi, an economist with Standard Chartered Bank in Jakarta, said easing year-over-year inflation and the stronger rupiah resulting from capital inflows would lead the central bank to cut its rate today.

However, he said concerns about rising month-over-month inflation would force it to refrain from any further cuts this year.

He added that today’s rate cut would be followed by a cut in the rate on Bank Indonesia Certificates (SBIs) to discourage banks from parking too much money in the securities instead of lending to businesses.

The Central Statistics Agency (BPS) on Monday reported that consumer prices rose 2.71 percent in July compared to the year-earlier period — a nine-year low that may leave the central bank room to cut its benchmark rate further. Year-over-year inflation had risen 3.65 percent in June.

Bank Danamon economist Helmi Arman described July’s inflation as “tame,” but said he was concerned about the likelihood of the government raising fuel prices next year. An increase in global prices, which would be expected if the world economy recovers, would place a burden on the government’s fuel subsidy, perhaps forcing it to raise prices.

“Data in the rear-view mirror still shows relatively muted inflationary pressures. But what should matter more is the future,” Helmi said.

Helmi pointed to President Susilo Bambang Yudhoyono’s statement in his budget speech on Monday that the government would gradually move away from blanket subsidies for fuel, electricity and food toward targeted subsidies. Helmi said this could create serious inflationary pressures.

“There was some ambiguity to his statement and this was probably intentional. So it’s not yet clear whether the shifting of price subsidies will involve any one-off adjustment in the prices of fuel and electricity,” Helmi said.

He added, however, that it was probably safe to assume that a rise in oil prices next year would create inflationary pressures that would exceed those seen in 2009.

“Therefore, we see room for just one more rate cut to 6.5 percent this month. Given potentially rising inflation, more rate cuts now could mean we would see a sharp reversal [of rates] next year,” Hemi said.

Finance Minister Sri Mulyani Indrawati had said oil prices may rise as high as $123 per barrel next year. “That would affect the 2010 budget significantly,” she said on Monday.