Indonesia Unexpectedly Cuts Key Rate to Boost Growth

By Aloysius Unditu and Arijit Ghosh


Dec. 4 (Bloomberg) -- Indonesia’s central bank unexpectedly lowered interest rates for the first time in a year to shield its economy from the global recession.

Governor Boediono and his seven colleagues reduced the benchmark rate to 9.25 percent from 9.5 percent, Bank Indonesia said in a statement in Jakarta today. Just six of 23 economists surveyed by Bloomberg News had forecast a cut.

Indonesia joins other Asian central banks in reducing borrowing costs to help boost growth, after the government cut its economic-growth forecast for 2009 to a seven-year low of 4.5 percent. The Bank of Thailand yesterday slashed its key policy rate by the most ever.

“Bank Indonesia wants to signal to the market that it is acting preemptively to prevent growth from slowing sharply in 2009,” said Alexander Sugandi, an economist at Standard Chartered Plc in Jakarta. “Moreover, a high policy rate seems no longer effective for defending the rupiah.”

Indonesia’s government on Dec. 2 said it expects Southeast Asia’s largest economy to expand 4.5 percent next year, the slowest pace since 2002, as a worldwide recession saps demand for the nation’s exports.

“The decision to cut the rate was taken after evaluating financial and economic prospects, both in the domestic and global market,” Bank Indonesia said today. “The impact of the financial crisis on the global economy is getting real.”

More Reductions

New Zealand’s central bank today reduced its benchmark rate by a record 1.5 percentage points to 5 percent and signaled more reductions. The Reserve Bank of Australia on Dec. 2 lowered its key rate by one percentage point, extending the biggest round of reductions since a recession in 1991.

Indonesia’s consumer prices increased 11.7 percent in November from a year earlier, after gaining 11.8 percent in October. That’s the highest in Southeast Asia outside Vietnam. Wholesale-price inflation slowed to 27.5 percent in September, when money-supply growth accelerated to 16.9 percent.

Still, the rupiah has declined 24.3 percent in the past three months, making it the worst performing among Asia’s 10 most-traded currencies outside Japan.

The rupiah rose 1.3 percent to 11,990 against the dollar at 1:14 p.m. in Jakarta. The benchmark stock index gained 1 percent at the midday break.

Bank Indonesia also cut its overnight repurchase rate to 9.75 percent, while the deposit rate was raised to 8.75 percent, the central bank said