Indonesia May Cut Interest Rate in Second Quarter

``For this quarter, the reduction is pretty limited,'' Deputy Governor Hartadi Sarwono said yesterday in an interview in Jakarta. ``Before we see improvement in the supply side, we can't reduce it too fast. But of course in the second and third quarters, if everything's going well, the room is still there.''

The central bank, which has cut the rate used as a reference for bill sales nine times since May to 9.25 percent, wants to further reduce borrowing costs to boost consumer spending and encourage investment. Still, higher food prices may stoke inflation this month following floods in Jakarta, which accounts for about 27 percent of the consumer price index.

``We think rates will be 8.75 percent to 9 percent by year- end, which means the central bank has just two bullets left and it's only February,'' said Raymond Gin, director of investment at PT Manulife Asset Management in Jakarta, which manages about $1.2 billion in assets. ``Inflationary pressures due to the flood may delay further rate cuts in the near term.''

Bank Indonesia wants to keep its so-called BI Rate, used as an indicator for one-month bill sales, about 2 percentage points above inflation, Deputy Governor Sarwono said. The central bank expects inflation to average 5 percent to 7 percent this year.

Rice Imports

To help tame inflation, the government will import rice, the staple food for Indonesia's 242 million people. President Susilo Bambang Yudhoyono's government will also extend its policy of selling rice at below-market rates to keep the grain affordable for the nation's poor.

``We expect prices of rice will come back down,'' Coordinating Minister for the Economy Boediono said in Jakarta yesterday ``They will stabilize in the following months.''

The price of the lowest quality rice rose 11 percent to 5,000 rupiah a kilogram yesterday, from 4,500 rupiah a kilogram on Feb. 1, according to PT Food Station Tjipinang Jaya, which runs Indonesia's biggest rice market near the capital, Jakarta.

``Our concern is if this shock will be permanent,'' Sarwono said. ``Right now, we conceive it will be temporary. Hopefully, with rice imports and good distribution in the country, hopefully it will reduce inflation.''

The government expects a surplus rice supply of 1.7 million metric tons in March from a shortfall of 377,000 tons in February, Agriculture Minister Anton Apriantono said yesterday.

Accelerating Growth

In 2005, the central bank had to raise its key rate six times in five months to support the rupiah and control inflation after the government more than doubled fuel prices in October that year. The rate was raised to 12.75 in December 2005.

Lower interest rates may help Indonesian consumers and companies borrow more to take advantage of the accelerating economy. The country's $351 billion economy will expand by 5.7 percent to 6.3 percent in 2007, the central bank said in a statement on Nov. 22.

The central bank expects the U.S. Federal Reserve to keep its policy rate steady or lower the rate, easing concern that investors may move funds from Indonesia in search of higher yields.

``We believe the Fed fund will stay put or decline by 25 basis points, so the spread between the two countries is okay and this will reduce the pressure for capital movement,'' Sarwono said. A basis point is 0.01 percentage point.

The rupiah, which was the second-best performing among 15 Asia-Pacific currencies tracked by Bloomberg last year, rose 0.3 percent to 9,043 against the dollar yesterday.

Overseas investment in Indonesian government bonds fell 0.2 percent in January from a month earlier, the Ministry of Finance said. Foreign investors held 54.83 trillion rupiah ($6.1 billion) of government bonds at the end of January, down from 54.92 trillion rupiah in December, the finance ministry said in a statement published on its Web site.

Overseas investors began purchasing Indonesian bonds after the central bank raised its policy rate to 12.75 percent in December 2005. They held a record 58.12 trillion in August last year.

Source: Bloomberg