Bank Indonesia’s board of governors is scheduled to hold a highly anticipated meeting today to discuss cutting the benchmark interest rate, but analysts and legislators predict they will hold off until next year.
The central bank’s senior deputy governor said on Wednesday that full-year inflation in 2008 could be slightly more than 11 percent, just below its forecast of 11.5 percent to 12.5 percent, signaling to the market a chance to cut the interest rate.
“Until the end of the year, inflation is likely to be around 11 percent,” Miranda Goeltom said on the sidelines of a hearing at the House of Representatives. “When the inflation trend is downward, it gives wider room for Bank Indonesia to cut the interest rate, but we have not decided yet on when.”
The Central Statistics Agency announced on Monday that year-on-year inflation had eased to 11.68 percent in November from 11.7 percent the previous month, and from January through November, inflation was 11.1 percent. This prompted speculation on whether the central bank would cut its benchmark rate.
The business community has urged the central bank to do so — the rate is currently 9.5 percent — to help the private sector cope with lower global demand for commodities, which has forced a number of industries to start calculating the cost of laying off or even terminating workers.
The benchmark interest rate, which has been raised six times this year from 8 percent, has been blamed for hampering consumer spending, the main driver of economic growth.
Juniman, an economist at Bank Internasional Indonesia, said a rate cut was unlikely this month because of concerns about its impact on the ailing rupiah, which has fallen about 30 percent against the US dollar in the past few months. On Wednesday afternoon in Jakarta, the rupiah was trading at Rp 11,950, up from 12,400 on Monday.
Today “the BI rate is likely to remain at 9.5 percent due to concern over the rupiah,” Juniman said. “The currency’s depreciation is one of the worst in the region. I think BI would be wise to hold it until the end of the year.”
Drajad Wibowo, a member of House Commission XI, which oversees budget and financial issues, echoed this comment, saying an interest rate cut would be risky due to the rupiah’s volatility and the possibility of capital outflow.
“I don’t think the moment has come yet,” he said. “If Bank Indonesia lowers its benchmark rate, it will make the rupiah more unattractive. “In addition, given that there is no blanket guarantee for bank deposits, it will likely cause a huge amount of money to flee the country, which would lead to added pressure that could weaken the rupiah.”
The rupiah has depreciated due to the decreasing supply of dollars, caused by foreign investors dumping portfolio assets in emerging markets, including Indonesia, in favor of safer havens such as US Treasury bonds and bills on worries of a global economic recession.
Hartadi Sarwono, a central bank deputy governor, said he saw signs that offshore investors had begun putting their funds in BI debt paper, or SBI. “Over the past week, SBIs held by offshore investors increased from Rp 6.11 trillion ($513.24 million) to Rp 6.54 trillion,” he said.
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