Bloomberg Indonesia Cuts Rate to Spur Consumer Spending as Economy Slows

Indonesia Cuts Rate to Spur Consumer Spending as Economy Slows
2009-03-04 05:12:59.510 GMT

By Aloysius Unditu and Arijit Ghosh
March 4 (Bloomberg) -- Indonesia's central bank reduced its benchmark interest rate for a fourth straight month to help boost consumer spending as exports plummet.
Governor Boediono and his seven colleagues lowered the key rate to 7.75 percent from 8.25 percent, the central bank said in a statement in Jakarta today. The cut was expected by seven of 19 economists surveyed by Bloomberg News, with the other 12
forecasting a quarter-point reduction.

Indonesia is banking on local demand for homes, cars and motorcycles to sustain growth after exports plunged the most in 22 years in January. Merrill Lynch & Co. last week cut its 2009 growth forecast for Southeast Asia's largest economy to 3.6
percent, the weakest pace of expansion since 2001. ``We have to rely on domestic demand'' to boost growth, said Destry Damayanti, an economist at PT Mandiri Sekuritas in Jakarta. ``If we take a big cut, then expectations are higher'' that commercial lending rates will also decline, she said.

Private consumption, which accounts for about 70 percent of the $433 billion Indonesian economy, increased 4.8 percent in the final three months of 2008, the weakest pace of growth in six quarters. Car sales at the Indonesian unit of Toyota Motor Corp. and rivals fell 23 percent to 31,637 in January, the lowest in 15
months. Motorcycles sales plunged 22 percent in the month. Overseas shipments declined 35.5 percent in January to $7.15 billion from a year earlier, the Central Statistics Bureau said March 2. That's the biggest drop since 1986. Consumer prices rose 8.6 percent in February from a year earlier, the smallest increase in 11 months.

Slowing Inflation
Finance Minister Sri Mulyani Indrawati on March 2 said she expects consumer prices gains to slow every month until July. Bank Indonesia is targeting to keep inflation within 5 percent to 7 percent this year. Manufacturers in Japan, Indonesia's biggest export market, cut production by a record 10 percent in January, adding to evidence the economy is in its worst recession in 60 years. ``Our Japanese economist is now forecasting a sharp recession for the economy this year which means this downward
trend in Indonesian export growth is unlikely to reverse any time soon,'' Chan Kok Peng, chief economist at BNP Paribas Securities Asia in Singapore, said in a note on March 2. Policy makers across Asia are slashing borrowing costs and increasing government spending to help the region cope with the global economy's worst crisis since the Great Depression. Asia is almost twice as reliant on exports as the rest of the world. President Susilo Bambang Yudhoyono's government forecasts Indonesian economic growth this year of 4.5 percent, slowing from 2008's 6.1 percent pace of expansion.

To sustain growth, the government has proposed a 73.3 trillion rupiah ($6.1 billion) stimulus package. Indonesia last week sold $3 billion of dollar-denominated bonds to help finance its spending. ``The banking sector is not lending because they have a
perception that credit risk will increase,'' said Mandiri's Damayanti. The government and the central bank need to take a lead to encourage banks to lend, she said.

For Related News and Information:
Stories on interest rates: {BI IJ TCNI MMK }
Indonesia's economic data: {ECST ID }