Bloomberg News

Indonesia Signals Readiness to Cut Rate as Growth Risks Rise

September 14, 2011

(Updates with currency intervention in third paragraph.)

Sept. 14 (Bloomberg) -- Indonesia’s central bank signaled it may join Brazil and Turkey among emerging markets cutting interest rates as Europe’s debt crisis threatens Southeast Asia’s biggest economy and spurs declines in the rupiah.

Bank Indonesia has room to cut its benchmark rate if inflation “behaves,” Deputy Governor Hartadi Sarwono said in Jakarta today. Policy makers are ready to “adjust the rate and mix monetary policy toward loosening” if price gains slow and the economy expands less than expected due to a global slowdown, Perry Warjiyo, the bank’s director of economic research, said late yesterday.

The central bank said it stepped in to halt losses in the rupiah today after it dropped as much as 2.6 percent, joining a decline in Asian currencies and stocks as Chinese Premier Wen Jiabao signaled that developed nations shouldn’t rely on China to bail out the world economy. Europe’s debt crisis and a weakening U.S. recovery prompted nations from Malaysia to South Korea to hold their key rates last week.

“As Bank Indonesia feels comfort that inflation this year will be in their range target, there’s room to cut rates because it will support growth,” said Winang Budoyo, chief economist at PT Bank CIMB Niaga in Jakarta. “Bank Indonesia may cut rates next year as the central bank should remain cautious on core inflation that’s still increasing.”

Currency Falls

The rupiah fell 1.5 percent to 8,843 a dollar as of 3:27 p.m. in Jakarta today, according to data compiled by Bloomberg. The Jakarta Composite Index declined 1.8 percent as regional stocks slumped, erasing an earlier gain of as much as 0.6 percent.

The currency’s drop today is caused by sentiment from the debt crisis in Europe and “technical factors” after the rupiah was quoted at above 9,000 to the dollar in Singapore, Sarwono told reporters. The central bank “intervened in the rupiah and bond markets” as it needed to calm the market and doesn’t want the currency to fall further, he said.

Wen, facing calls to widen support for indebted European countries, said at the World Economic Forum in Dalian, China that “countries must first put their own houses in order.” Greek Prime Minister George Papandreou will hold a conference call with German Chancellor Angela Merkel and French President Nicolas Sarkozy today amid increasing speculation that Greece will default.

Rate Cuts

Indonesia kept its reference rate unchanged at 6.75 percent for a seventh month on Sept. 8 while allowing lower interbank lending rates as concern the global recovery is faltering prompted policy makers to move to protect growth. The last increase in Indonesia’s benchmark rate was a 0.25 percentage- point move in February.

Turkey’s central bank unexpectedly cut its benchmark interest rate to a record-low 5.75 percent in August and took separate steps to support the lira, which weakened to a two-year low on the news. The Brazilian central bank cut its key rate to 12 percent.

Bank Indonesia said Sept. 9 it will require companies to place export revenue and offshore-loan proceeds at Indonesia financial institutions in order to increase domestic foreign- currency supplies, a move Standard Chartered Plc said may lead to lower lending rates and bolster demand for credit.

Transition Period

The measure will take effect Oct. 1, Governor Darmin Nasution told reporters today. There will be a sanction-free transition period from Oct. 1 until January for companies to report revenue and proceeds, he said. The move will result in about $29.5 billion of foreign currency being added to Indonesia’s banking system, Nasution said.

The Asian Development Bank cut its 2011 growth forecast for Asia excluding Japan to 7.5 percent today from an April estimate of 7.8 percent even as it raised the region’s inflation forecast to 5.8 percent. Price gains are “a continuing concern” and policy makers will have to accelerate monetary tightening if commodity prices resume their climb and the current weakness in the global recovery turns out to be temporary, the lender said.

While Indonesia’s inflation accelerated in August, economic expansion has eased to about 6.5 percent in the first half of 2011 from 6.89 percent late last year.

“The crisis in Europe will affect global demand, including Indonesia’s export performance,” Sarwono told reporters yesterday. “Indonesia’s economic growth could be lower than the 6.7 percent targeted next year, perhaps 6.5 percent.”

Achieving 6.7 percent growth is possible if the government focuses on domestic consumption and optimizing government spending, he said.

--With assistance from Novrida Manurung and Berni Moestafa in Jakarta, Sunil Jagtiani in Singapore. Editors: Greg Ahlstrand, Stephanie Phang

To contact the reporter on this story: Widya Utami in Jakarta at wutami@bloomberg.net

To contact the editor responsible for this story: Greg Ahlstrand at gahlstrand@bloomberg.net


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