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Indonesia central bank cuts key rate to 14-month low JAKARTA - Indonesia's central bank cut its benchmark interest rate to a 14-month low, the seventh reduction since May, to help revive consumer spending and boost investment. Bank Indonesia Governor Burhanuddin Abdullah and his fellow policy makers reduced the rate used as a reference for bill sales by half a percentage point to 9.75 percent, a move predicted by 16 of 21 economists surveyed by Bloomberg News, and indicated further cuts are likely next year.

Declining interest rates helped PT Toyota-Astra Motor increase car sales in November for the first time in 11 months. The Asian Development Bank said today it expects growth in Southeast Asia's largest economy to accelerate to 6 percent next year, the fastest pace since a financial crisis hit the region in 1997-98.

The half-point cut "gives a psychological effect that rates will come down next year because of lower expected inflation,'' said Eko Pratomo, president director of PT Fortis Investment, which manages an equivalent of $713 million in assets in Jakarta. "It's good Bank Indonesia has been successfully managing and has reached the target of reducing its key rate to a single digit,'' which will help boost growth.

Local bonds rose. The yield on the 10 percent note due in July 2017 fell 11 basis points, or 0.11 percentage point, to 10.45 percent as of 4:11 p.m. in Jakarta, according to Inter Dealer Market Association. The price rose 0.69, or 6,900 rupiah per 1 million rupiah face amount, to 97.09.

Borrowers return

Lower interest rates are encouraging Indonesian banks to boost credit as borrowers return. PT Bank Mega may sell at least 1 trillion rupiah ($110 million) of bonds in the first half of next year to fund new lending, said Daniel Budirahaju, director of credit at Bank Mega. The Jakarta-based bank has cut borrowing costs for companies as much as 1 percentage point since May and may reduce rates again in January.

Lending expanded 9 percent in the first 10 months of 2006 from the same period last year, as banks lent 66 trillion rupiah of new loans, the central bank said. "If the 6 percent inflation rate forecast can be achieved next year, there is still room for a further cut in interest rates,'' the central bank said in a statement in Jakarta today. "Looking ahead, economic activity is expected to gather momentum, despite some risks that call for vigilance. In view of these conditions, Bank Indonesia will pursue a more measured, cautious actions in monetary policy operations.''

Rupiah gains

Fortis has been buying shares of companies, including banks that benefit from a reduction in rates, said Alvin Pattisahusiwa, a fund manager for equities at Fortis. The rupiah, which has risen 8.3 percent this year and is the third-best performing of 15 Asia-Pacific currencies tracked by Bloomberg, rose 0.4 percent to 9,075 against the U.S. dollar at 4:42 p.m. in Jakarta, the highest about four months.

"The rupiah is stable and volatility in the currency is narrowing,'' central bank spokesman Budi Mulya told reporters in Jakarta today. The central bank forecasts the current account surplus to narrow to $6.2 billion in 2007 from an estimated $9.6 billion this year, as an economic acceleration boosts imports, he said. Bank Indonesia expects imports to rise by about 13 percent to $80 billion next year, while exports may rise 2.8 percent to $109 billion.

Inflation cools

Indonesia's inflation rate cooled in November to the lowest in 2 1/2 years. Consumer prices rose 5.3 percent from a year earlier, after gaining 6.3 percent in October, the Central Statistics Bureau said this month. Last month's lower-than-expected inflation gave the central bank "quite a lot of flexibility,'' said Song Seng Wun, an economist at CIMB GK Securities Pte in Singapore. "The inflation rate is slowing, assuming the government doesn't hike prices in fuel, that would give the central bank room to continue in more moderate steps, cuts next year.''

Bank Indonesia raised its key interest rate six times in five months to December 2005, to stem inflation after the government more than doubled fuel prices, and to boost the rupiah from a four-year low. It began cutting rates in May, which helped boost consumer confidence. Still, prices may rise faster than expected after the government raises salaries of civil servants and increases gas tariffs, economists including Juniman said.

As inflation may pose a threat next year ``the momentum to cut rates is now,'' said Juniman, an economist at PT Bank Internasional Indonesia year.

Posted in Economy @ 08 December 2006 03:03 CET by Jeroen · 'Blog' RSS feed · permalink

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