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Interest Rate Cut Welcomed

Tuesday July 18, 2006

Bank Indonesia (BI) cut its benchmark interest rate by 25 basis points to 12.25% on 6/7/06 as on-year inflation eased in June to 15.53% from 15.60% in May, winning praise from Coordinating Minister for Economic Affairs, Boediono.



BI’s cut was "a good step", Boediono said Friday, as reported by Bloomberg News. "Hopefully, the macroeconomic conditions will allow further cuts, since in particular inflation needs to be kept at a low level," he said, adding that the government would closely monitor supply and demand to keep inflation under control, reported Indonesia Trade and Industry News issued by the Coordinating Ministry of Economic Affairs.   



Inflation slowed for a third month in four in June to 15.5% after gaining 15.6% in May. Core inflation, which excludes energy prices, rose to 9.6% in June from 9.5% in May.



Central bank Governor Burhanuddin Abdullah Bank told the House of Representatives budget committee on Thursday that the benchmark rate could fall to around 10% by the end of the year if on-year inflation falls to around 8%, Kompas reported.



"If the year-on-year inflation rate at the end of 2006 is 8%, the BI rate could be around 11%. If inflation is below 8%, the rate could be around 10%," he said.



He added that the central bank will cut the rate more "aggressively'" if inflation continues to ease and the rupiah is stable.



      Record Exports in May



Exports reached a new high on strong commodity prices, posting a record of $8.34 billion in May, up from $7.60 billion in April. Export figures for the first five months stand at $38.39 billion, up 13.4% on the same period last year, reports the Coordinating Ministry of Economic Affairs.



Crude oil exports in the first five months increased by 8.10% to $3.3 billion from $3.1 million in the same period last year. Total oil and gas exports from January to May increased by 17.68% to $8.6 billion.



Non-oil exports during the five months pulled in $29.8 billion, up 12.2% over the same period last year.



Imports stood at $23.14 billion for the five months, producing a trade surplus of $15.25 billion.




Reforms of the Banking Sector



The government further unveiled the latest package in its reform process with a better deal on non-performing loans for state banks, an improved environment for government shariah bonds and faster state company privatization.



The Wall Street Journal commented the ‘centerpiece’ of the package is the move to boost state banks' ability to recover non-performing loans.



Under the new regulation, "state-owned banks will have the same status as domestic commercial banks in resolving non-performing assets," Minister of Finance Sri Mulyani Indrawati told reporters.



State-owned banks had been complaining that regulations controlling their ability to renegotiate debt put them at a disadvantage to private banks.



In September the government will submit a draft regulation to Parliament allowing the issuance of Islamic bonds, the statement said.



The statement said the government will form a committee in August to draw up a blueprint for giving priority to the privatization of state-owned firms. The blueprint should be completed in November, it added.