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Cablegate: Bank Indonesia Cuts Rates to Spur Growth

VZCZCXRO8283
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2206/01 3391013
ZNR UUUUU ZZH
R 041013Z DEC 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0887
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2810
RUEHBJ/AMEMBASSY BEIJING 5698
RUEHBY/AMEMBASSY CANBERRA 3372
RUEHUL/AMEMBASSY SEOUL 5198
RUEHGP/AMEMBASSY SINGAPORE 6391
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002206

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS, EAP/EP AND EEB/IFD/OMA
TREASURY FOR IA/MALACHY NUGENT AND TRINA RAND
COMMERCE FOR 4430/KELLY
DEPT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
DEPARTMENT PASS EXIM BANK
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER
DEPT PASS USTR WEISEL, EHLERS

E.O. 12598: N/A
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: BANK INDONESIA CUTS RATES TO SPUR GROWTH

REF: Jakarta 2140

1. (SBU) Summary. Bank Indonesia (BI) lowered its overnight policy
rate by 25 basis points to 9.25% on December 4, surprising many
market analysts. BI based the decision largely on Indonesia's
rapidly deteriorating economic growth outlook, particularly as
demand for Indonesian commodities falls. BI's policy statement also
cited moderating domestic price levels as a key factor in the
decision. While BI's rate cut is in line with the actions of most
other central banks in the region, many observers had expected BI to
maintain rates due to the rapid depreciation of the Rupiah (IDR) in
recent weeks and the risk that the weakened currency could reignite
inflation. A sharp drop in exports in October and the ongoing
threat of capital flight continue to weigh heavily on the currency.
The foreign exchange market reacted somewhat negatively to the
mid-day decision, with the IDR losing most gains made earlier in the
day to close at 11,900 IDR/USD on December 4. End summary.

Bank Indonesia Cuts Rate on Signs of Slower Growth
--------------------------------------------- -----
2. (SBU) BI lowered its overnight policy rate by 25 basis points due
to the deteriorating outlook for economic growth and lower inflation
in November. While third quarter 2008 growth remained robust
(reftel), signs of significant slowdown in economic activity emerged
in October and November. October exports declined 11.6% over the
previous month and grew at a modest 4.9% over the previous year.
Imports also declined on a month-on-month basis in October, but by a
smaller margin, falling 5.9%. Poor export performance was
attributed to weaker global demand for Indonesian commodities,
including palm oil and rubber, as well as Indonesian manufactured
goods, such as garments and wood products. October rubber and
garment exports contracted the most dramatically, falling 172.5% and
95.1% (mom), respectively. Bank credit also showed signs of
weakening in November, putting further pressure on the corporate
sector, according to BI's policy statement. [Note: The policy
statement did not cite the specific credit growth rate for November.
End note.] In an effort to further increase liquidity in the
banking sector, BI also raised its rate on overnight bank deposits
by 50 basis points and lowered the overnight repo rate charged to
banks by 50 basis points on December 4.

3. (SBU) Consumer price inflation (CPI) continued to decelerate in
November, increasing 0.12% (mom) and 11.68% (yoy), down from 0.5%
(mom) and 11.8% (yoy) in October, providing room for policy easing,
according to BI's December 4 statement. Basic food prices declined
0.14% (mom), as global commodity prices continued to slump.
Transportation and communication prices also declined in November,
dropping 0.31% (mom), due in large part to the temporary increase in
transportation costs during the Idul Fitri holiday in October. Data
from local markets collected by the Foreign Agricultural Service,
indicate that the price of rice, cooking oil and soybeans declined
in November, falling 2.6%, 19.3%, and 2.4% (mom), respectively.


Pressure on IDR Likely to Continue
----------------------------------
4. (SBU) Market analysts have expressed concern that a policy rate
cut could further undermine the value to the IDR and reignite
inflation in the coming months. BI's policy statement recognized
the significant depreciation in the IDR in recent weeks and the
central bank pledged to continue to intervene in foreign exchange
markets to smooth IDR volatility. The IDR is among the worst
performing currencies in the region, falling more than 25% over the
past two months. BI has not yet disclosed the level of its foreign
currency reserves as of the end of November, making it difficult to
determine the extent to which the central bank has intervened in
currency market in recent weeks. Yet pressure on the IDR is
unlikely to ease in the coming months, given signs of a
deteriorating current account and the ongoing risk of capital
flight. A recent Bank Danamon report noted that it would take

JAKARTA 00002206 002 OF 002


several months for the domestic prices of manufactured goods with
high import content, such as apparel and pharmaceuticals, to reflect
the weakened value of the currency. The foreign exchange market
reacted somewhat negatively to the mid-day rate cut, with the IDR
losing most gains made earlier in the day to close at 11,900 IDR/USD
on December 4. A growing number of currency analysts are predicting
that the IDR will weaken to 13,000 IDR/USD or beyond in the coming
months.

HUME

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