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Indonesia Unexpectedly Cuts Interest Rate to Support Growth

Bank Indonesia Governor Darmin Nasution
Darmin Nasution, governor of Bank Indonesia. Photographer: Dimas Ardian/Bloomberg

Indonesia’s central bank unexpectedly cut its benchmark interest rate for the first time in three months, taking advantage of easing inflation 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 move 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.

“BI has had a dovish bias and is taking full advantage of the declining headline inflation in recent months to push interest rates structurally lower,” said Eugene Leow, an economist in Singapore at DBS Group Holdings Ltd. who predicted the cut. Still, with higher electricity and fuel prices imminent in April, “aggressive cuts from this point may be viewed negatively by investors,” he said.

Inflation slowed for a fifth straight month in January to 3.65 percent, and the central bank reiterated today an inflation target of 3.5 percent to 5.5 percent for 2012 and 2013.

Rupiah Falls

The nation’s currency fell 0.5 percent to 8,976 per dollar as of 3:17 p.m. local time. The Jakarta Composite index fell 0.7 percent, paring a loss of as much as 0.9 percent earlier.

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

“We cut the interest rate with some reason,” Deputy Governor Halim Alamsyah said in Jakarta today after the rate decision was announced. “In order to maintain growth momentum, we provided a stimulus. We see that the exchange rate is relatively stable and won’t be much affected, and we expect an increase in capital inflows. Thirdly, in the context of our monetary framework right now, we want to takes steps to normalize interest rates.”

‘Boost Growth’

Today’s decision was made to “boost growth” amid a slowing global economy, and the priority remains achieving the inflation target and exchange-rate stability, the monetary authority said in a statement.

Bank Indonesia will “continue to optimize the role of monetary policy in boosting economic capacity, maintaining financial market stability, and mitigating the impacts of global economic slowdown, while at the same time anchoring inflation expectation,” it said.

The economy will expand 6.5 percent in the first quarter from a year earlier, the central bank forecast today. For the full year, it expects growth of 6.3 percent to 6.7 percent, supported by strong domestic demand and investment even as trade may slow.

“This really is a pre-emptive move to continue providing support for the economy,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “The central bank has highlighted downside risks to growth and is likely to revise its 2012 growth forecast very soon.”

Effect on Companies

Today’s rate cut will benefit companies in the consumer and financial industries, said Budi Rustano, an analyst at PT Valbury Asia Securities in Jakarta. The impact on the stock market should be positive, he said.

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.

The nation’s policy makers have also signaled they are prepared to support the economy with 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 the global slowdown.

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.

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