Inflation eases further; BI may cut key rate Aditya Suharmoko , The Jakarta Post , Jakarta | Tue, 06/02/2009 2:06 PM | Business
Consumer prices continued to ease in May, according to the Central Statistics Agency (BPS), providing the central bank - which will convene later this week - with more scope to cut its benchmark interest rate. Inflation rose 6.04 percent in May from a year earlier, BPS head Rusman Heriawan said in a press conference Monday. On a monthly basis, May saw an inflation rate of 0.04 percent, resulting in 0.1 percent inflation between January and May. In the January-May period last year, inflation increased 5.47 percent. Of 66 cities surveyed by BPS, 40 suffered inflation, while 22 had deflation. Maumere in Flores had the highest inflation of 1.58 percent, while Jayapura in Papua had the highest deflation of 1.31 percent. "If inflation in June is lower than the 2.46 percent recorded in June last year, then inflation will slow down further, and may touch 5 percent for the full year," Rusman added. A benign inflation bodes well to efforts to keep people's purchasing power robust. A prerequisite to retaining a strong domestic consumption which is the main driver of the country's economy. Finance Minister Sri Mulyani Indrawati said in a hearing with the House of Representatives' budget committee that inflation might ease to between 5 percent and 5.5 percent by the year's end. The central bank shares the same opinion. "Managed prices are low, food supplies are good. It is very positive, and could make inflation reach a lowest level of 5 percent," acting Bank Indonesia (BI) governor Miranda S. Goeltom said in the hearing. "It's just like (what happened) in 2003, when inflation stood at 5.06 percent," she added. BI will hold its collegial meeting on Wednesday to determine its benchmark interest rate, which currently stands at 7.25 percent. "There is a room" for a rate cut, Miranda told reporters. The central bank has cut the interest rate by 2.25 percent since December to help drive up economic growth. A BI rate cut is expected to push banks to cut their lending rates, easing costs for businesses to expand despite the continuing global economic crisis, Ryan Kiryanto of Bank Negara Indonesia (BNI) said. "The inflation trend may prompt BI to consider a rate cut of 25 basis points to 7 percent. If inflation expectations in June *remain* low, the chance for a BI rate cut gets bigger," he said. But BI may choose to maintain its rate amid rising consumer confidence and recovering exports, said Prakriti Sofat, an economist with HSBC Holdings Plc., as reported by Bloomberg. "BI definitely has the flexibility to ease rates," he said. "(But) we think the bank is very close to the bottom in rates." "The recent central bank rate cuts have not been followed by banks cutting their lending rates," Miranda said last week. While the central bank has cut its rate by 225 basis points this year, banks so far cut their lending rates by 38 basis points only. Deposit rates, meanwhile, have fallen by 171 basis points. Inflation Performance ------------------2007----2008----2009 May (on-month)----0.10----1.41----0.04 January-May-------1.84----5.47----0.10 May (on-year)-----6.01----10.38---6.04 Source: Central Statistics Agency
