BI holds rate, sees Q1 growth of 4.58%

The Jakarta Post , Jakarta | Thu, 04/06/2006 9:29 AM | Business

The Jakarta Post, Jakarta

The central bank has kept its reference rate unchanged at 12.75 percent for the fourth consecutive month, citing continuing economic risks despite easing inflation but adding that it may begin to lower rates as early as next month as the risks subside.

Bank Indonesia Governor Burhanuddin Abdullah said that the central bank's board of governors had decided at its monthly policy meeting Wednesday not to lower the rate yet as there were still several risks on the horizon despite recent positive developments in the form of lower inflation and a strengthening rupiah.

""We still have to be cautious, and take into consideration future inflation expectations and the possibility of capital flight if we lower the rate too soon,"" he said.

""Investors may look to other countries in the region that are still maintaining high rates.""

He added, however, that BI may begin to cut its rate ""earlier than scheduled, probably in May or June"", if the positive developments in the economy continued in the coming months.

Burhanuddin had previously said that BI would maintain a ""tight-biased"" monetary policy at least until the first half of this year, before adopting a ""neutral stance"" and eventually lowering the rate. He acknowledged that March's lower inflation would provide room for future rate cuts, with inflation in April and May expected to continue on a downward path.

On-year inflation eased to 15.74 percent in March from 17.92 percent in February. Inflation soared to a full-year level of 17.11 percent in 2005 after last year's double fuel price hike, forcing BI to raise its rate six times from 8.5 percent in July.

High inflation and interest rates eventually slowed down Indonesia's consumption-driven economy, which grew by only 4.9 percent during last year's final quarter.

BI expects this year's first quarter growth to reach 4.58 percent, its board of governors said, as consumption revives on lower inflation, and a stronger rupiah makes imports cheaper so that inflation eases further.

Higher exports are also expected to support growth and, with recent capital inflows, help raise the country's first-three-month forex reserves to a record high of US$41.1 billion.

The central bank's latest rate move had no immediate effect on the rupiah or shares as it was announced after the markets had closed.

The rupiah touched an intraday high of Rp 8,975 against the U.S. dollar on Wednesday, but then closed slightly lower at Rp 9,015 per U.S. dollar, down from Tuesday's Rp 9,005, on profit-taking after recent rallies.

The currency may, however, build further on its 9.3 percent gain so far with a still-high BI Rate and positive forex reserves outlook.

The Jakarta Stock Exchange Composite Index, meanwhile, ended 1.4 percent higher at 1344.60 points as investors remained bullish, particularly toward bank stocks, on a positive outlook of lower inflation and interest rates.

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