BI CUTS KEY RATE TO STIMULATE ECONOMY

By Andi Abdussalam

Jakarta, Feb 4 (ANTARA) - Bank Indonesia (BI) lowered its benchmark interest rate on Wednesday by 50 basis points from 8.75 percent to 8.25 percent in an effort to encourage expansion of banking credits to businesses and to stimualte economic growth.

        "We cut the BI benchmark interest rate (locally called BI Rate) by 50 basis points in order to encourage credit expansion and stimulate economic growth," BI Senior Deputy Governor Miranda S Goeltom said.

        The central bank's move to cut its BI Rate is a signal that banks are expected to follow suit and lower their credit interest rates so that credits would expand and the economic growth target at 4.5 percent could be achieved.

        "We hope that the BI Rate cut will send a signal to banks that we need to cooperate and coordinate in an effort to stimulate the economy and to achieve the economic growth target of 4.5 percent," Goeltom said.

        The BI Rate was lowered only one day after an observer predicted that the central bank was likely to maintain its rate at 8.75 percent.

        "I think the BI Rate will be maintained for the time being at the current 8.75 percent level. Though a deflation of 0.07 percent was recorded in January, the rupiah has weakened to Rp11.300 per US dollar," economic observer Tony A Prasetyantono said on Tuesday.

        He said that besides the weakening of the rupiah, the country's balance of payments was also weakening so that it was risky for BI to cut its rate.

        BI director Dyah N.K. Makhijani said the central bank decided to lower its benchmark rate after carrying out an overall evaluation of economic and financial developments at home and abroad.

        Various indicators lately had shown that global economic developments were more gloomy than had been predicted several months earlier. The impact of the world economic crisis is being increasingly felt in Indonesia, particularly in sectors linked to international trade.

        Global economic developments are showing a worsening trend in 2009 as reflected in the downward revision of world economic growth from 2.1 percent to 0.5 percent.

        "As the economcies of the United States, Europe and Japan are have slowed down considerably, BI considers it necessary to send a signal to the banking world that economic growth needs to be fueled through good coordination," Goeltom said.

        "BI understands what policy needs to be pursued in the current conditions. We hope that this will serve as a signal that we want banks to begin extending more credits," she said.

        Banking observer Kostaman Thayib said the BI Rate cut would speed up the lowering of bank credit interest rates which at present ranged between 18 percent and 22 percent, and thus expand credits.

        "We predict that the banking sector will lower its credit interest rates sooner than expected now that BI has lowered its rate to 8.25 percent," Kostaman Thayib said here on Wednesday.

        He said the cut in the BI Rate would reduce banks' cost of funds which so far had been a heavy burden in banks' operations. It would also encourage banks to channel more credits to the public so that banks will be able to perform their intermediary function as expected.

        Kostaman said that banks would be active in expanding their credits in the second semester of 2009 so that the economy would grow faster because businesses would be aggressive in seeking credits to fuel their operations. So far, bank customers had tended to be cautious in seeking new loans because credit interest rates were relatively high.

        The BI Rate cut was also welcomed by the stock market which had so far hoped that it would be lowered to 8.25 percent, Kostaman said.

        Money market analyst Edwin Sinaga meanwhile doubted that banks would soon follow the BI's step and cut their interest rates.

        Sinaga, who is also director of PT Finan Corporindo Nusa, said that BI had lowered its rate three times from 9.50 percent to the present 8.25 percent, but "have banks responded to those cuts and lowered their interest rates also," he asked.

        Last month, BI cut its benchmark rate by 50 basis points from 9.25 percent to 8.75 percent. At the time, BI saw a good inflation development.

        In December 2008, according to the Central Bureau of Statistics (BPS), a 0.04 percent deflation also took place, mainly because of cuts in the prices of subsidized fuel oils.

        Sinaga said banks had so far been in a race to absorb funds from the public by offering attractive interest rates so that they could beef up their third-party funds. The race in build up third-party funds was one of the factors that had caused banks to maintain the interest rates on their credits.

        However, chairman of the Indonesian Bankers Association (IBI) Agus Martowardojo said banks will consider lowering their lending rates now that Bank Indonesia had cut its key rate by 50 basis points to 8.25 percent.

        "Admittedly, banks still have room to cut their lending rates. And the fact that the benchmark interest rate has been lowered is warmly welcomed," Martowardojo who is also president director of state-owned Bank Mandiri said.***2*** (T.A014/A/HAJM/B003) 2. 20:15. (T.A014/A/A014/B003) 04-02-2009 20:51:03