Bank Indonesia cut its benchmark rate by 50bps to 7.75%, in line with our forecast but higher than consensus estimate. This was the third cut of such magnitude since the beginning of the year from 9.25% in light of worsening growth outlook, while inflation is ebbing.
The recent sales data on consumer sectors highlighted the downside risk on the economic growth, given the fact that private consumption contributes around 60% of
total GDP. Car and motorcycle sales dropped by 23.5% yoy and 22.3% yoy respectively,
while on mom basis they fell by 20.2% and 8.7%. Retail sales from Ramayana stores
declined by 2.1% yoy (vs. 6.5% yoy in Dec08). A significant drop in external demand,
reflected in the 36.1% yoy plunge in exports in Jan09, has also increased the need for domestic demand growth stimulus. Bank Indonesia projected the economy to only grow by 4.0% in 2009, slowing from 6.1% last year. But it still warned that growth could undershoot such projection if the global downturn is worse than expected.
We remain concerned on the rigidity of lending rate in responding to the BI rate cuts because it could mitigate the effectiveness of the monetary policy. As of end Feb09, the average rupiah-lending rate was 16.5% merely declining from 16.7% end of Jan09, despite total 100-bp cut since the end of last year. Furthermore, the decline in BI rate and narrower spread between SBI, the alternative liquidity placement, and BI rate might be needed to encourage banks to lend.
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