Indonesia: Central Bank Signals Readiness to Push On with Rate Cuts As Budget Gdp Forecast Trimmed After Weak Q1; Projected Budget Deficit Doubled to 1.4% of Gdp

Summary

---

Bank Indonesia indicated strongly on 29 June that it expects to trim interest rates again next week, following on from what it hinted would be a further easing in inflation in June. After the scare over outflows and falling regional markets persuaded the BI not to cut rates in June, it appears that it can now return to what it intends to be a series of rate cuts. BI governor Burhanuddin Abdullah said recently that the bank may step up the pace of interest rate cuts if inflation allows and might also cut rates by 50 basis points rather than the 25 basis points trimmed from the benchmark BI rate in May. The main reason why the central bank is now keen to cut rates even before the expected fall in inflation (chiefly in Q4 as year-earlier rises fall away) is the concern that growth could falter. The budget forecast of 6.2% growth this year has been revised to 5.9% but finance minister Sri Mulyani Indrawati is talking more in terms of 5.7-5.9% and Abdullah the upper end of a 5.0-5.7% range. The median market forecast for 2006 GDP growth is around 5.4%, reflecting the fact that the year started slowly as domestic demand remains subdued in the face of high inflation and interest rates following last October's sharp fuel price hike. Another significant adjustment in the revised budget forecasts was a doubling in the budget deficit to 1.4% of GDP from 0.7%, partly on reconstruction spending after the 27 May Yogyakarta earthquake. Substantial donor aid, totalling USD5.4bn, should help but one big problem remains slow spending disbursement, which may help contain the deficit but also checks growth. Ironically, one reason for this is the reluctance of officials to take any risks in releasing funds now that the government is getting tough on corruption.

See the full content of this document

Extract

---

Indonesia: Central Bank Signals Readiness to Push On with Rate Cuts As Budget Gdp Forecast Trimmed After Weak Q1; Projected Budget Deficit Doubled to 1.4% of Gdp

Central bank flags rate cut next week on lower June inflation

Bank Indonesia (BI) appeared to be flagging an early interest rate cut on 29 June when its chief spokesman, Budi Mulya, said baldly that "BI will always be committed to maintaining a prudent interest rate policy. An interest rate cut is imminent." Mulya explained to a seminar on capital markets that "In BI's perspective, June inflation is expected to be lower than May inflation, but we will also consider the policy rates of ...

See the full content of this document

---