Mansek 50bps cut : More breathing room for the economy

50bps cut : More breathing room for the economy

Bank Indonesia (BI), as expected, cut the benchmark rate by 50bps to 8.25%. Easing inflationary pressure and weakening domestic demand have encouraged BI to aggressively reduce the interest rate.

BI also mentioned that currently banking fundamentals remain sound and the liquidity has improved. This is reflected in bank’s capital and nonperforming loan ratio that remained in the safe limits.

Besides ensuring liquidity, we expect, BI to continue to improve its monetary policy transmission by narrowing spread between SBI and the BI rate. Thus, this could potentially enhance banks’ lending activities.

The impact on Rupiah, we believe, would be muted as recent movement in Rupiah exchange rate was more due to heightened risk aversion, which increased US$ demand across the globe.

Currently, we still maintain our BI rate forecast and inflation forecast at 8.0% and 6.8% yoy at the end of 2009. However, given the recent data, there is probability that the inflation and interest rate may fall below our projection.