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