Indonesia's central bank cut its key interest rate by 25 basis points to a record low of 6.75 percent on Friday and signalled it was nearing the end of a rate cutting cycle. Bank Indonesia said inflation was not a concern despite a surge in global commodity prices but that it would conduct monetary policy more cautiously looking forward, a signal that the scope for further rate cuts was limited.
Most analysts polled by Reuters this week had forecast Friday's cut and said they expected just one further cut this year to take the main rate to 6.50 percent by the end of 2009. They said inflationary pressures would be more evident by the end of the year and that the central bank may move to raise rates again in the second half of 2010.
It has cut the overnight rate by a total of 2.75 percentage points since December 2008 as part of global efforts by policy makers to try to revive the ailing world economy. "Looking forward, monetary policy will be conducted more cautiously given that room for monetary easing is becoming more limited," the central bank said in a statement.
The central bank said inflation at the end of 2009 may come in below its forecast range of 5-7 percent while economic growth would be at the top end of its 3-4 percent forecast.
It said it saw no big build-up in inflationary pressures and a surge in commodity prices was not yet a concern. But, it was closely monitoring inflationary pressures that might arise in 2010. "I was a bit surprised when the bank said that the surge in commodity prices is not yet a concern, I think it soon will become one," said Prakriti Sofat, economist at HSBC in Singapore.
"We believe, they (inflationary pressures) would start rising from the fourth quarter of this year. I think they (BI) might hike interest rates in the second half of 2010," she said. The Reuters-Jefferies CRB index, which measures 19 commodities, has risen 23 percent from its low in February. Oil prices have doubled since that month. Economist Eric Alexander Sugandi of Standard Chartered Bank said interest rates "will likely start rising next year. Our view is that it will be in the third quarter."
The central bank said it cut rates again to help generate faster loan growth. While the central bank has cut rates 275 basis points since December, commercial banks have cut their lending rates by around 100 basis points. The central bank is trying to lift economic growth, which it estimated had slipped to 4 percent at best in the second quarter from a year earlier. That would mark the lowest growth in 5 years and a slowdown from first-quarter growth of 4.4 percent. Deputy Governor Hartadi Sarwono had raised expectations of a rate cut by saying on Monday that the central bank had room to cut interest rates further.
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