Friday July 3, 01:15 AM
SCENARIOS-Likely comments from Indonesia c.bank on rates,economy
By Gde Anugrah Arka
JAKARTA, July 2 (Reuters) - Indonesia's central bank is expected to cut its benchmark overnight policy rate for the eighth month in a row on Friday, to a record low of 6.75 percent, as it seeks to boost growth in
Southeast Asia's biggest economy.
Bank Indonesia (BI) has cut the rate by 2.5 percentage points since December 2008.
Following are some scenarios on what the central bank might say in its statement issued after the monthly policy rate meeting:
BI LIKELY TO FLAG RISK OF INFLATION PICKING UP NEXT YEAR
Bank Indonesia is likely to signal it is nearing an end to its rate cutting cycle, while putting more emphasis on the higher risk of inflationary pressures picking up next year than it did in its previous statement on June 3, following a surge in global oil and commodity prices.
It will probably say that its monetary policy is 'forward-looking', a term markets consider very significant.
Typically, BI officials use the expression 'forward-looking' when approaching a turning point in rate policy. The central bank has not yet used this reference in its monthly rate statement in the current cycle.
Bank Indonesia, however, is likely to reiterate that it is on track to meet its 2009 inflation forecast of 5-7 percent, most likely hitting the lower end of the forecast range, in a bid to calm any expectations of rates being raised in the near term.
Such comments are unlikely to have much impact on financial markets.
The bond market has already priced in the possibility of limited further rate cuts, with a 25-basis-point cut expected in July and another 25-basis-point cut by the end of the year seen as the last in the current monetary easing cycle.
The central bank first noted the risk of inflationary pressures picking up next year after its last monetary policy meeting on June 3.
If BI comes out and flags inflation concerns strongly, Indonesian bond yields may rise. Fixed income traders had expected bond yields to decline further in the next months, after falling sharply in June, on expectations of lower interest rates.
WILL BANK INDONESIA SIGNAL A NEAR-TERM RATE RISE?
It is very unlikely that it will signal a near-term interest rate rise in its statement accompanying the rate decision.
Besides reiterating its 2009 inflation forecast, the central bank is likely to note that a firmer rupiah would reduce imported inflationary pressures.
Still, the central bank is likely to be less dovish, stressing the need to be cautious in its monetary policy, given the threat of inflation from higher global oil prices.
The government may have to hike the price of subsidised domestic fuel to reduce the burden of subsidies if global oil prices rise further. Indonesia imports large amounts of fuel for domestic needs.
Annual inflation eased to 3.65 percent in June, its slowest pace in nine years, from 6.04 percent in May, largely because of a high base effect as a result of the hike in the subsidised fuel price in May 2008.
BI EXPRESSES OPTIMISM ON THE ECONOMY
Underlining the notion that it is coming to an end of its easing cycle, Bank Indonesia is likely to paint a cautiously brighter picture of the economy in the face of gains in the rupiah, bonds, and the domestic stock market.
A stronger rupiah would help reduce pressure from imported goods especially food, which has a significant weighting in the consumer price index.
The central bank is likely to keep its 2009 growth forecast for Southeast Asia's biggest economy at 3-4 percent, making it among the few Asian countries expected to post positive economic growth this year, thanks to steady domestic demand.
(Reporting by Gde Anugrah Arka; Editing by Sara Webb & Kim Coghill)
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