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Friday February 10, 2012

Indonesia makes surprise rate cut

JAKARTA: Indonesia's central bank unexpectedly cut its policy rate by 25 basis points to 5.75%, after keeping it steady the past two months, in a bid to ensure the economy maintains strong growth.

The cut reinforces Bank Indonesia's position as one of the most dovish worldwide. It has loosened policy as insurance against weaker global growth even though there are concerns that inflation will rise this year in Indonesia.

Bank Indonesia cut rates by 25 basis points (bps) in October and 50 bps in November, signalling it was worried about a possible repeat of the 2008 global downturn. But so far, the global picture has not been that grim and potential price pressures at home may force the central bank to walk a tightrope in designing its policy.

Indonesia achieved 6.5% full-year growth last year, the highest since 1996, and inflation in January further slowed to an annual rate of 3.65%, though analysts said planned government fuel price hikes and pouring rains could push up prices later this year.

Yesterday's surprise cut “presumably really is a preemptive move to continue providing support for the economy, as the central bank has highlighted downside risks to growth and likely to revise its 2012 growth forecast very soon,” said Gundy Cahyadi, an economist at OCBC Bank in Singapore.

“We question the need for this rate cut, as credit growth and M2 money supply growth have continued to be at high levels, and inflationary risks remain in the picture,” Cahyadi said.

Twelve of 16 economists polled by Reuters had expected Bank Indonesia to hold rates. Some changed their view to hold from a rate cut after seeing a strong 6.5% growth in the last quarter of 2011, with robust investment and private consumption compensating for a slowing in export growth to single digit in November and December.

South Korea's central bank, meanwhile, held its key policy interest rate steady at 3.25% for an eighth consecutive month yesterday, as it grapples with persistently high inflation and weakening growth. - Reuters

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