Bloomberg News

Indonesia Unexpectedly Cuts Interest Rate to Support Growth

February 09, 2012

(Updates with comment from economist in fourth paragraph.)

Feb. 9 (Bloomberg) -- Indonesia’s central bank unexpectedly cut its benchmark interest rate for the first time in three months to support growth in a deteriorating global economy.

Governor Darmin Nasution and his board lowered the reference rate by a quarter of a percentage point to 5.75 percent from 6 percent, Bank Indonesia said in a statement in Jakarta today. The decision was predicted by four of 15 economists surveyed by Bloomberg News, with the rest expecting no change.

Indonesia joins the Philippines and Thailand in cutting borrowing costs in the past month, while the Bank of Korea held off raising rates today as policy makers act to counter weakening global demand. Southeast Asia’s largest economy, which grew 6.5 percent last year in the biggest gain since before the Asian financial crisis, may expand less than 6 percent this year if Europe suffers a severe recession, according to Bambang Brodjonegoro, head of fiscal policy at the finance ministry.

“External demand conditions will likely weaken further,” Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc., said before the decision. “The associated softening in commodity prices should also add to some headwinds in domestic demand, given Indonesia’s status as a commodity exporter.”

Helping Banks

Bank Indonesia, which cut borrowing costs twice in the final quarter of 2011, kept the benchmark rate unchanged in the previous two policy meetings. Instead, it has widened the lower range of its interbank lending rate to push borrowing costs lower.

Lower borrowing costs have bolstered profit at lenders including PT Bank Rakyat Indonesia. The nation’s second-biggest bank by market value expects net income to have risen by at least 15 percent last year, it said Jan. 24.

Indonesia’s inflation slowed for a fifth straight month in January to 3.65 percent.

President Susilo Bambang Yudhoyono’s efforts to boost the $707 billion economy by an average 6.6 percent a year have been bolstered by recent ratings upgrades to investment level from Moody’s Investors Service and Fitch Ratings after 14 years. The nation’s policy makers have signaled they are prepared to support the economy with monetary and fiscal stimulus.

The government said in September it was preparing a stimulus package, and Brodjonegoro said last month the country will increase spending to bolster growth and limit the impact of a global slowdown.

--With assistance from Hidayat Setiaji, Berni Moestafa and Greg Ahlstrand in Jakarta, and Manish Modi in New Delhi. Editors: Rina Chandran, Stephanie Phang.

To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Widya Utami in Jakarta at wutami@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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