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January 8, 2009

Indonesia central bank cuts rates to boost growth
Indonesia's central bank slashed interest rates more than expected on Wednesday and said it may cut again to spur economic growth, just days after the government announced a $6.6 billion fiscal stimulus package, reported Reuters.

The half-point cut aims to soften the impact of the global crisis on Southeast Asia's biggest nation, where economic growth, prices, jobs and poverty will be among the key issues for voters in elections later this year.

"The risk from inflationary pressure is milder compared to the risk concerning economic activity, therefore the move needed to be effective and we decided to go ahead with a 50 basis point cut," Bank Indonesia Deputy Governor Hartadi Sarwono told a news conference.

"With regards to the possibility of lowering the BI rate further, there is still room. But it all depends on inflation and economic conditions," he said.

Inflation has fallen from a September peak of more than 12 percent to just above 11 percent in December and the government expects it to drop into single digits in mid-2009.

The central bank said economic growth this year would slow to between 4 and 5 percent from an estimated 6.2 percent in 2008.

That would still make Indonesia one of Asia's top performers, but economists say it needs to grow by 6 percent a year to absorb the many of its 226 million population who reach working age each year.

Economists said Wednesday's move that followed a quarter-point cut in December should support government efforts to prop up the economy and saw more cuts before the end of the first quarter.

"This will definitely help the government's planned stimulus package," said Gundy Cahyadi, an economist at IDEAglobal in Singapore.

The stimulus, which includes plans to spend on roads, ports, airports and railroads, is intended to create jobs and reduce business costs due to the country's creaking infrastructure.

"The rate cut will provide a stimulus to the economy. But the key lies in the fiscal policy, as well," said Eric Sugandi of Standard Chartered Bank in Jakarta.

"As Indonesia's economy is mostly driven by domestic consumption, now it's up to how the government sustains the purchasing power of households."

The finance ministry welcomed the rate cut, saying it should support government bonds.

"We see the prices of government bonds in the last two days have been increasing. We are optimistic it will be better in the future," treasury director Rahmat Waluyanto said.

The ministry on Wednesday said it planned to sell retail sukuk, or Islamic, bonds next month, and a yen-denominated bond issue, possibly around the middle of the year.

Anggito Abimanyu, head of fiscal policy at the finance ministry, said the government aims to get approval for standby loans of about $5.5 billion in the first quarter.

The loans, from the World Bank, Asian Development Bank, and some donor countries, would be used if the government cannot meet its debt issuance target.

With the global economy rapidly losing steam and the world's top economies already in a recession, other central banks in Asia have also been slashing borrowing costs to support faltering growth.

The Reserve Bank of India cut its benchmark rate by 1 percentage point on January 2, while the Bank of Korea is expected to follow suit with a half percentage point cut on January 9.

Investors pulled out of emerging markets like Indonesia late last year, in response to the global financial crisis, leading to a sharp drop in Indonesian stocks, bonds and the currency, which hit a decade low near 13,000 per dollar.

Analysts said lingering concerns about the rupiah may limit the scope for further rate cuts, even though the currency gained after the rate decision to 10,700 to the dollar from 10,850, reflecting market optimism about the growth outlook.

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