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BI moves to bolster growth

For the fifth month in a row, the central bank slashed its key interest rate to bolster domestic demand and stimulate economic growth slowed by a sharp drop in exports

The Jakarta Post
JAKARTA
Sat, April 4, 2009

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BI moves to bolster growth

For the fifth month in a row, the central bank slashed its key interest rate to bolster domestic demand and stimulate economic growth slowed by a sharp drop in exports.

The Bank Indonesia rate was cut by 25 basis point to 7.5 percent, BI Governor Boediono said Friday at a press conference, adding it had room for even more cuts.

“We decided to cut the rates after a thorough evaluation of the economy and the financial situation, both abroad and domestically,” Boediono said.

“Positive sentiments have been growing in the global economy following the G20 meeting, at which agreements were made on improving financial and capital market performance.”

The central bank earlier cut its growth forecast for this year as the impacts on the country of the global economic meltdown worsened. It predicts the economy to grow by 3 to 4 percent this year, instead of initial forecasts of 4 to 5 percent.

Data from the Central Statistics Agency (BPS) showed exports had dropped 32.8 percent in February from a year earlier.

A lower BI rate will force banks to lower their lending interest rates, boosting loan demand from companies and individual consumers alike, thus spurring economic growth.

Indonesia's economy relies heavily on domestic consumption, which makes up around 70 percent of gross domestic products (GDP).

With inflation also easing, the rate cut was fairly understandable, according to Sri Adiningsih, an economist at Gadjah Mada University in Yogyakarta.

“I see that inflation will continue to ease in the next few months to come, and the BI rate should be able to decline down to 7 percent,” she said.

She added state-owned banks should lead the way in giving out loans at lower interest rates.

“Private banks will prefer to go for profit by maintaining the spread between deposits and interest rates, so it's important for state-owned banks to be the pioneers and encourage other banks to take the same policy,” she said.

She added current national bank credit loan rates stand between 12 and 15 percent.

Muliaman Hadad, a BI deputy governor, said the central bank would put more effort into building positive perception within the banking industry.

“Credit loan rates from public banks are gradually decreasing, and we will continue to encourage bankers to continue lowering their loan rates,” he said.

BI has been cutting its benchmark interest rate since December. However, it has so far failed to jack up bank lending demand.

BI data shows that as of the end of December, outstanding bank loans stood at Rp 1,307.7 trillion, but dropped to Rp 1,289.8 trillion at the end of January.

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