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The central bank cut its benchmark interest rate by a quarter
percentage point Thursday to 9.5 percent, a 16-month low, with faster
economic growth and a stable macroeconomic environment expected to
characterize 2007.
"We expect this year to be a promising one for the country's economy,"
BI governor Burhanuddin Abdullah said after a monthly meeting of the
central bank's board of governors.
Burhanuddin said the economy proved itself resilient in 2006, with
inflation ending up lower than the target of approximately 8 percent,
despite the fuel-price hikes at the end of 2005, which resulted in
inflation at the start of 2006 rising to 17 percent.
"As we all know, the fuel-price increases had a first-round impact that
lifted inflation to 17 percent. There was also the second-round effect
on transportation costs and electricity prices. Those impacts were the
focus of our monetary policies in 2006," said BI deputy governor for
monetary policy Hartadi A. Sarwono.
"I can safely say that we have succeeded in minimizing the adverse
impacts from the second round."
Since May, BI has been cautiously trimming its key interest rate, with
it having come down to 9.75 by the end of 2006.
However, the interest rate on commercial bank loans still stands at
between 14 and 15 percent.
Turning to 2007, Burhanuddin said that economic growth would reach
between 5.7 and 6.3 percent, higher than 2006's growth of approximately
5.5 percent, as inflation was expected to come in at around 6 percent
this year.
Easing inflation, Hartadi added, would help accelerate economic
activity on higher loan demand, thus reducing the huge excess liquidity
within the banking sector.
"The excess liquidity will be diminished through increased lending. We
are targeting around an 18 percent increase in lending in 2007," he
said. By contrast, lending growth in 2006 came in at a mediocre 12.5
percent.
Despite the upbeat outlook, a number of structural problems would
continue to pose a threat to the economy.
"The poor investment climate, weak market structure, lack of
infrastructure and bureaucratic problems will slow down investment
growth and cause inefficiencies in production. Hence, low
productivity," Burhanuddin said.
With this in mind, BI's monetary and banking policy would focus on
supporting the government's efforts to address these problems, he said.
"Our focus is broader than just the infrastructure issue. We will
review a number of regulations this year so that we can act to support
the current positive momentum, which will continue through 2007,"
senior deputy governor Miranda S. Goeltom said, without elaborating.
"I think we put sufficient policy changes in place in 2006. Therefore,
our main focus in 2007 will be on facilitation and making sure
information is being circulated as hoped," said BI deputy governor for
banking policy Muliaman M. Hadad.
"Sometimes the intermediation process becomes jammed due to
insufficient information. So, this will be our main objective, together
with the other banks and relevant institutions in 2007," he explained.
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