Vehicles pass in front of the Bank Indonesia headquarters in Jakarta, Indonesia, in January 2009

Indonesia may cut interest rates once more to stoke growth before faster inflation next year prompts policy makers to raise borrowing costs, economists said.

“Policy makers may soon throw in the towel in cutting rates,” said Helmi Arman, an economist at Bank Danamon in Jakarta. He expects Bank Indonesia’s reference rate to be reduced to a “bottom” of 6.5 percent by August.

Bank Indonesia yesterday said its scope for further rate cuts was “limited” and that it was watching for inflation pressures in 2010 from higher commodity costs. Central banks in India and South Korea may also start raising borrowing costs early next year, according to analysts, as policy makers across Asia signal that economies in the region could be past the worst of the worldwide recession.

“As the global economy recovers, the inflation risk looms,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “Although we expect Indonesian inflation to be restrained in 2009, it may not be the case in 2010.”

Indonesian consumer prices in June rose 3.65 percent from a year earlier, the statistics office said on July 1. That was the smallest increase since June 2000 and less than the 3.85 percent median forecast in a Bloomberg News survey of 20 economists.

‘Bottoming out’

Bank Indonesia is “confident” inflation will be below 5 percent this year, acting Governor Miranda Goeltom said at a briefing in Jakarta yesterday.

Consumer price gains may average 4.9 percent this year, compared with an earlier prediction of 5.2 percent, Johanna Chua, head of Asia-Pacific economic research at Citigroup in Hong Kong, said in a report yesterday.

“Headline inflation will head even lower in the coming months, bottoming out in September as favorable base effects persist, before rising in the fourth quarter to about 4 percent by year-end,” Chua said in the report. “We expect one more rate cut from here.”

Inflation in Indonesia may ease to a range of 2 percent to 4 percent for the remaining months of 2009, according to Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore.

“However, a rebound in inflation next year to around 6.5 percent to 7 percent by the middle of 2010 will then require Bank Indonesia to reverse the monetary easing probably as early as the first quarter,” she said.

Credit-default swaps

Indonesia’s improving economic outlook has pushed it out of the world’s 10 riskiest issuers of sovereign bonds, according to credit-default swap prices from Credit Market Analysis.

Monetary policy will be directed toward “maintaining macroeconomic and financial system stability,” Bank Indonesia said in yesterday’s statement. “With this consideration, monetary policy will be done more carefully considering that the room for monetary easing is getting limited.”

Indonesia has been less affected than its neighbors by the worst global recession since the Great Depression as it isn’t as reliant on exports. The $433 billion economy expanded 4.4 percent in the three months to March 31 from a year earlier, the fastest pace in Southeast Asia.

The $433 billion Indonesian economy is forecast to expand 4.6 percent in the second half from an estimated 4.1 percent in the first six months of 2009, Finance Minister Sri Mulyani Indrawati said June 30. The economy may expand 4.3 percent this year, helped by domestic consumption, Sri Mulyani said.

India, South Korea

Indonesia isn’t the only economy in Asia where policy makers might soon begin to raise borrowing costs amid signs that higher commodity prices could prompt a flare up in inflation.

The Reserve Bank of India may start increasing interest rates from record lows in early 2010 as inflation accelerates at more than double the expected pace, Goldman Sachs economist Tushar Poddar said in a June 10 report. Barclays Plc says the central bank may raise borrowing costs as early as next quarter.

South Korea’s economic downturn “does not look so severe now” and the nation’s central bank may raise interest rates by at least 25 basis points by the end of the year, Credit Suisse Group AG said in a June 18 report.

The $970 billion South Korean economy will probably shrink 1.5 percent this year, less than an April forecast of a 2 percent contraction, the Ministry of Strategy and Finance said June 25. Growth of 4 percent is expected in 2010, it said.

Other central banks in the region have stopped lowering borrowing costs, judging that earlier interest-rate cuts and stimulus plans worth as much as $950 billion are beginning to revive Asia’s economies.

Bank Negara Malaysia on May 26 refrained from cutting interest rates for a second straight meeting, betting the economy will improve after contracting in the first quarter for the first time since 2001.

Thailand’s central bank kept interest rates on hold on May 20 to assess the effect of its most aggressive series of cuts ever on an economy facing its first recession in a decade.

Source: Bloomberg