Observers said while it was too aggressive and could create panic in the market, the cut by 50 basis points of the BI rate could not be expected to help boost the real sector in the short term. Moreover, the inflation rate was also expected to be high at the end of the year.
"The cut in the BI rate by six percent surprises us. Although the year to date inflation rate is still expected at below 4.5 percent now, yet at the end of the year there will be a threat of inflation from the food sector which could push up inflation further," Danareksa Research Institute economist Purbaya Yudhi Sadewa said.
Bank Indonesia decided on Thursday to cut its benchmark interest rate by 50 basis points to 6 percent in line with its expectation of low inflationary pressure ahead.
Bank Indonesia Governor Darmin Nasution said the decision to cut the key rate known as BI Rate was part of the efforts to improve the short-, medium- and long-term interest structure.
Unlike the BI prediction, Purbaya Yudhi Sadewa said BI`s decision to cut its rate was surprising because the year-end inflationary pressure was predicted to be strong. He predicted that in the short term the lowering of the BI rate could raise market concern that would in turn create panic.
"What is feared is that the market will have negative expectations due to the cut by 50 basis points. Capital will continue to come in but BI should not be that aggressive in cutting its benchmark rate," he said.
However, according to Acting Head of the Finance Ministry`s Fiscal Policy Affairs Bambang Brodjonegoro, BI had taken into account low inflationary pressure in the coming three months so that it had the courage to lower its rate from 6.50 percent to 6 percent.
After all, the lowering of the Bank Indonesia`s benchmark rate would help boost economic growth.
"We believe the BI rate cut will spur growth through increased consumption and real sector development," Bambang said here on Thursday.
Yet, Purbaya said the lowering of the interest rate could not directly accelerate the real sector as it would need time for at least four months before it could generate the development of the real sector.
Purbawa said that the BI might have taken the step as an anticipatory measure in the face of global economic slowdown. However, the Indonesian economy was not yet affected by the crisis, as reflected in the fact that in the third quarter of 2011, the economic growth was still 6.5 percent.
"Yes, it has positive impact on the economic growth, but it will have negative effect if the December inflation is higher where the BI rate would become too low," Purbaya said.
Bank Central Asia (BCA) economist David Sumual meanwhile said that there were two things that needed to be watched out with regard to the BI rate cut, namely the declining of the capital inflow and the weakening of the rupiah local currency.
"The BI Rate cut will slow the capital inflow because yields will decline and the rupiah currency will weaken," he said.
In the meantime, other economic observer Ryan Kiryanto said that the central bank`s policy to cut its rate by 50 basis points was an aggressive decision and was beyond the predictions of many who had expected that the cut would be at 25 basis points.
Seen from the inflation point of view, the inflation was relatively low namely below 5 percent and projection for 2012 was to be kept at about 5 percent.
"BI must also have looked into the national macroeconomic situation which remained well maintained, even if the European and United States economic crisis is still a threat," he said.
He said that BI was convinced that the lowering of its rate would not put pressure on the rupiah currency because the central banks of other countries also did the same thing.
"The six percent rate is a good asset by BI to enter 2012 because it is expected that the rate will be maintained in December," Ryan said.
Therefore, the BI step should be followed by banks in lowering their lending rates so that economic growth could be protected from the impact of European economic crisis, Ryan said.
"Banks should respond it soon and lower the rates of their commercial interests so that the real sector would expand," Ryan Kiryanto.
BI spokesman Difi A Johansyah explained that BI had decided to lower its interest rate by 50 basis points because of its lower inflation projection this year and in 2012 it was expected to be below five percent.
"We are optimistic that the inflation rate will be one percent below the target, namely about four percent. That is why the interest rate is lowered again," he said.
With low inflation, the real interest rate of Indonesia becomes relatively high so that the BI rate should be cut by 50 basis points. "Besides, we are concerned with the world economic growth ahead that could affect our exports," he said.
According to BI Governor Darmin Nasution, the cut is intended to ease the impact of worsening global economic prospects on the Indonesian economy.
He said developed nations` production and consumption continued to grow at a slow pace while the global financial market remained volatile although it rebounded earlier.
On the other hand, the domestic financial market had become increasingly stable, coupled with positive market sentiment thanks to the policies taken by Bank Indonesia and the government, he said. (*)
Reporter: By Andi Abdussalam
Editor: Kunto Wibisono
Copyright © ANTARA 2011
