BI cuts prime rate due to lower inflation rate

The Jakarta Post ,  Jakarta   |  Wed, 05/09/2007 7:01 AM  |  Business

Urip Hudiono, The Jakarta Post, Jakarta

The central bank took the opportunity provided by last month's lower inflation to trim its key rate again in the hope of spurring higher growth ahead.

Bank Indonesia lowered the rate it uses as a benchmark for bank lending and bill sales Tuesday by a quarter percentage point to 8.75 percent after consumer prices fell by 0.16 percent in April, leaving year-on-year inflation at 6.3 percent.

The central bank kept its prime rate at 9 percent last month following mixed results for March inflation, which came in at a lower 0.24 percent monthly level but a higher year-on-year level of 6.52 percent.

BI Governor Burhanuddin Abdullah said he hoped the rate cut would help spur economic growth, which BI says could reach 6 percent during this second quarter of 2007.

""The signs of recovery in the real sector have been encouraging lately, and should accelerate more with today's lowering of the BI rate,"" Burhanuddin said in a statement released after BI's Board of Governors policy meeting.

Lower inflation and interest rates should help Indonesia's mostly consumption-driven economy, as people's purchasing power improves on stabler and more affordable prices. Businesses should also be encouraged to invest on the back cheaper loans to meet rising consumer demand.

The government is looking for growth of 6.3 percent for this year, compared with last year's 5.5 percent.

BI noted that lending rose to Rp 843 trillion (US$93.6 billion) as of the end of March, up from February's figure of Rp 826.3 trillion. Indonesia's banking industry also showed improved indicators for the first quarter, with the average loan-to-deposit ratio rising to 65 percent, and the bad-loan ratio falling to 3.1 percent.

Bank Negara Indonesia (BNI) economist Ryan Kiryanto said that cheaper loans for the real sector could be expected if the Deposit Insurance Agency (LPS) follows suit in lowering its 9 percent maximum rate for guaranteed deposits, thereby encouraging the banks to thin the interest margin between loans and deposits.

Lending rates still range between 14 percent and 16 percent, with deposit rates standing at between 7 percent and 9 percent.

Ryan said that BI's rate cut had been widely expected and would not significantly affect the rupiah, which recently strengthened against the U.S. dollar to an average of Rp 9,096 as of the end of April.

On Tuesday, the rupiah firmed slightly to Rp 8,885 to the dollar from Rp 8,900, while the Jakarta Stock Exchange Composite Index failed to build on the back of BI rate cut as regional markets fell, slipping by 14.251 points to 2,022.790.

The U.S. Federal Reserve will hold its next policy meeting on May 9 to determine whether to further increase its rate, which currently stands at 5.25 percent, which could affect the attractiveness of assets in emerging markets such as Indonesia.

Tuesday's BI rate cut will likely leave an opportunity for just one more trim over the course of the year, with the central bank expecting the rate to end up at 8.5 percent by the end of 2007.

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