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The central bank cut its key interest rate by 25 basis points
to 8.5 percent Thursday, the 12th cut since May last year, to help
boost bank lending and spur economic growth.
Easing inflation, which slowed to 6 percent on-year in May from 6.3
percent a month earlier, was the main reason behind the rate cut, said
Bank Indonesia Governor Burhanuddin Abdullah in a statement following a
BI board of governors meeting.
The May price figures marked a six-month low, and leave inflation after
the first six months of the year at 1.84 percent, meaning that
Indonesia has a "good chance of hitting the full-year inflation target
of 5-7 percent this year, and 4-6 percent next year," Burhanuddin said.
The central bank hopes that Thursday's rate cut will spur more growth
and help improve the country's business climate, while at the same time
maintaining stability in the financial markets.
It definitely bodes well for the country's US$266 billion economy to
achieve this year's government growth target of 6.5 percent, the
statement added.
"In general, economic expansion continued into the first quarter.
Economic growth in the first quarter stood at 5.97 percent, which is
higher than BI's initial projection."
Since May last year, the central bank has progressively reduced its
rate by a total of 4.25 percent to try to help revive the economy,
which was badly hit by double-digit inflation and interest rates in the
aftermath of 2005's double round of domestic fuel price hikes.
As a result, the economy grew last year by a less-then-expected 5.5
percent, even lower than the 2005's growth rate of 5.6 percent.
Bank Indonesia expects the decline in interest rates to allow the
banking sector to play a greater role in reinvigorating the country's
real sector.
By the end of April, BI figures show, bank lending had grown by 16.5
percent from a year earlier, with the loan-to-deposit ratio (LDR)
hitting 65.8 percent -- the highest level for the last six years.
Last year, bank lending expanded by a modest 14 percent.
BI's rate policy has been facilitated by the appreciating rupiah and
sound foreign-exchange reserves.
Indonesia's forex reserves stood a $50.1 billion last month, while the
rupiah appreciated in May to an average of 8,838 against the dollar
from 9,093 in April.
While the economic prospects look good, Bank Indonesia said it would
like to see better coordination with the government as part of the
effort to improve the investment climate, especially in dealing with
the non-financing obstacles currently hampering the progress of
infrastructure projects.
BI said that regulations were also needed that would ensure the
effective utilization of funds by local governments so as to revive the
real sector in their respective regions.
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