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Indonesia central bank mulls cutting rates
Indonesia's central bank on Wednesday signalled room for further interest rate cuts to support economic growth, and tightened lending rules to protect the financial system from derivatives products, reported Reuters.

The restrictions follow a series of orchestrated moves by Bank Indonesia and the finance ministry in recent months to ease the pressure from the global financial crisis on Southeast Asia's largest economy and its rupiah currency, which had fallen to its lowest level against the dollar in a decade.

Bank Indonesia's senior deputy governor, Miranda Goeltom, said the central bank saw room to cut its benchmark interest rate BIPG following a hefty rate cut by the U.S. Federal Reserve and expectations of weaker price pressures.

"There is certainly room but we have not made any decision," Goeltom said when asked whether Bank Indonesia, which cut its benchmark rate by 25 basis points on December 4, would follow the Fed's easing.

The US Federal Reserve broke into uncharted territory by chopping benchmark rates to near zero on December 16 and pledging to use "all available tools" to turn back a deepening recession.

Goeltom said that because of a further easing of prices in December, "there is a possibility for the annual inflation to be a little below 11 percent."

The country's consumer price index (CPI) rose 11.68 percent in November from a year earlier, slightly below October's inflation rate of 11.77 percent, due to lower food price pressures.

Finance Minister Sri Mulyani Indrawati forecast on Dec. 2 that GDP growth for 2008 would come in at 6.2 percent, slightly below an earlier forecast of 6.4 percent, while GDP growth in 2009, an election year, is seen at 4.5-6.0 percent.

The central bank issued two regulations to curb speculation in the rupiah, banning banks from making loans or overdrafts that could be used for certain derivative transactions.

The central bank has been criticised for a lack of effective monitoring of such derivative products, which some analysts said had created a large potential dollar demand and put further downward pressure on the rupiah.

"Banks are not allowed to give loans in foreign exchange or rupiah to customers to be used for derivative transactions against the rupiah," Bank Indonesia said in statement published late on Tuesday night on its website (

It also said that commercial banks, both local and foreign lenders, are not allowed to give overdrafts to customers for the purpose of foreign exchange trading against the rupiah.

"If this policy is implemented consistently and provided that monitoring is tight, I think this will reduce (rupiah) fluctuations because one factor which lead to such fluctuations is derivatives," said Bien Subiantoro, managing director at the country's No. 4 lender, PT Bank Negara Indonesia (BNI).

Bank Indonesia said the ban does not affect foreign exchange derivative transactions against rupiah used to finance exports and imports, subject to the availability of supporting documents.

Last month, the central bank imposed a $100,000 monthly limit on the purchase of foreign currencies, unless supported by underlying transactions such as for imports.

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