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Impact of global crisis looming - Indonesia central bank

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November 6, 2008

Impact of global crisis looming - Indonesia central bank
Having expanded by a fairly healthy 6.4 percent in the third quarter, the economy is facing a slowdown in the last quarter as it begins to feel the impacts of the global crisis, reported a local daily, quoting the central bank.

"With two months left to run in the fourth quarter, we estimate the impact of the global slowdown will hit Indonesia's economy, resulting at best in growth of around 5.9 percent," the Jakarta Post quoted Bank Indonesia (BI) deputy governor Hartadi A. Sarwono as saying Wednesday.

That should bring "full-year growth between 6.1 percent and 6.2 percent," he said.

The Central Statistics Agency (BPS) will report the official growth figure of the third quarter on November 15. In 2007, the economy grew by 6.3 percent.

Hartadi said exports would decline in the last two months of 2008, although early in November the figures suggested better than expected results.

"From our latest data, we see that in the fourth quarter of 2008 there should be some good news despite the drastic drop in global demand. Exports are not as bad as predicted.

"Still, the full impact of slowing global exports and imports will be felt in 2009."

As demand from the United States, the world's largest importer, slows amid a recession and investor concerns, the economy will find "a new equilibrium", Hartadi said, without elaborating.

The rupiah will also adjust to the conditions, setting a new comfortable rate against the dollar, he said. "When the rupiah has adjusted, it will be assisted by policy responses from BI to have an orderly adjustment."

On Wednesday, the rupiah weakened to 11,050 per dollar, Bloomberg reported.

If the rupiah finds a new rate against the dollar, the balance of payments will find equalise. Imports will drop and exports will adjust to the economic growth, creating a whole new balance in monetary policies, Hartadi said.

BI will use its monetary policies as an anchor to curb inflation expectations, a major problem hampering economic growth.

BI expects inflation to reach between 6.5 percent and 7.5 percent in 2009.

According to BPS, inflation reached 10.96 percent between January and October this year.

BI had raised its interest rate by 25 basis points in six straight months from 8 percent in May to 9.5 percent in October. BI will hold a collegial meeting Thursday to decide its rate policy.

Economist Fadhil Hasan said BI might hold its rate as inflation expectations would remain a problem for the next three months, undermining economic growth.

"BI rate policy has a mid-term aim. In that context, BI will not cut its rate, but businesses will complain," he said.

A higher BI rate will prompt banks to raise their lending rate, increasing borrowing costs for businesses.

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