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‘Limited’ Scope For Further Cuts To Key BI Rate
Ardian Wibisono & Muhamad Al Azhari | July 03, 2009

Miranda Goeltom, the central bank’s acting governor, said she was optimistic that full-year inflation in 2009 would finish below the BI’s earlier projection of between 5 percent and 7 percent. (Photo: Antara) Miranda Goeltom, the central bank’s acting governor, said she was optimistic that full-year inflation in 2009 would finish below the BI’s earlier projection of between 5 percent and 7 percent. (Photo: Antara)
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Bank Indonesia, after lowering its key interest rate again on Friday for the eighth time in as many months, said that room for further cuts was “limited,” due to concerns about rising inflationary pressures next year amid signs of an economic recovery.

The central bank shaved another quarter basis point off its key interest rate on Friday, lowering it to 6.75 percent in a bid to encourage banks to lend more to businesses.

“Moving forward, monetary policy will be aimed at maintaining a balance between supporting the domestic economy and efforts to manage macroeconomic stability,” BI said in a statement.

“Future monetary policy will be based on the idea that room for further monetary easing is becoming more limited.”

Miranda Goeltom, the central bank’s acting governor, said she was optimistic that full-year inflation in 2009 would finish below the BI’s earlier projection of between 5 percent and 7 percent.

She said this new projection was based on seasonal factors that could spur inflation, such as key national holidays.

“Commodity prices have improved lately, but they are not an inflation threat,” Goeltom said.

“We also do not see [unusual] sources that might spark inflationary pressures.”

Low inflation, such as the 3.65 percent year-on-year figure for June announced on Wednesday — a nine-year low — usually means the central bank is more willing to cut its key rate.

There is still some debate among analysts about the medium-term outlook for interest rates.

Prakriti Sofat, a Singapore-based economist at HSBC, said he believed that inflation would start picking up from the fourth quarter and continue to rise into next year.

Sofat said that consumer price expectations had already risen for three consecutive months, although they remain well below levels seen last year.

Sofat said there was only another 25 basis points left to be cut in the key rate, which would bring it to 6.5 percent, its likely bottom for the year.

Due to signs of an economic recovery in the second quarter, the central bank said it also believed that the domestic economy would start to bounce back in the second half.

This could help to encourage banks to lend to businesses, it said.

Goeltom said several banks had recently increased lending targets for several “resilient” sectors, such as telecommunication and plantations.

But lending growth will still probably be lower than the 35 percent posted in 2008, due to the impact of the global economic slowdown, she said.

“If lending growth can reach 15 percent as targeted, then this could support 4 percent GDP growth this year,” Goeltom said.

Credit growth had only reached 17 percent year-on-year by the end of May, according to the central bank’s figures.