From Government of Indonesia

Rate Cut May Be the Last

Bank Indonesia (BI) Governor Burhanuddin Abdullah said there is “not much to gain” from more rate cuts after the central bank board dropped the benchmark rate by a further quarter of a percentage point to 9% on Tuesday.

The central bank cut its key interest rate by a quarter of a percentage point to 9% on Tuesday (6/3/07), the 10th cut in almost a year and a reflection of the authority's confidence that inflation is under control.

Abdullah also warned that any further cuts in coming months could boomerang, noting that the gradual cut in the BI rate since mid-2006 would be more significant if it is coupled with an attempt to maintain economic recovery.

The central bank made the decision to cut the benchmark rate after determining that inflationary pressure remains under control despite recent severe flooding in Jakarta, BI spokesman Budi Mulya told reporters.

Dow Jones Newswires cited analysts as stating that the cut - the third straight 25-basis-point cut after a string of 50-basis-point cuts - suggests the central bank has entered a long-anticipated moderation of monetary policy easing in 2007.

Finance Minister Sri Mulyani Indrawati sad she was confident about the inflation outlook, saying the 2007 budget target for yearend inflation of 6% could be met if the prices of commodities remain under control.

State Minister of National Development Planning Paskah Suzetta said a range of natural disasters was likely to push this year’s budget deficit out to 1.3% of 2007 gross domestic product, compared to the original forecast of 1.1%.

Trade Minister Mari Pangestu said the government was working to bring the price of rice down to Rp5,000 a kg, good news for low income earners, after rises that began late last year.

In the banking sector, net interest income showed an upward trend, jumping to Rp7.9 trillion, the highest since the monetary crisis nine years ago, the BI governor said.

The amount of non-performing loans had also been successfully kept down as a result of the restructuring of debts incurred by large borrowers. January's NPLs accounted for 6.8% of the total outstanding loans, down from 7% at the end of 2006.

Hopes for success of the government’s crash power plant construction program rose with the announcement that contracts would be signed on March 12 with four Chinese companies to go ahead with a total of 1800 MW of power capacity construction.

Two more deals with Chinese companies are awaiting final approval while another four plants included in the crash program are to be retendered.

The plants make up a fast-track program to provide additional power supply of about 10,000 MW by 2009.
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