INTERVIEW-UPDATE 1-Indonesia's c.bank sees scope for rate cuts

Published: 30 May 2009 19:21:15 PST

SINGAPORE, May 29 - Falling inflation in Indonesia has created room for further interest rate cuts, while the rupiah's strengthening should cause little alarm, acting central bank governor Miranda Goeltom said on Friday.

Goeltom's comments ahead of the central bank's policy review next week tend to reinforce market expectations that a rate cut was in the pipeline.

"Inflation is coming down. There is still room for us to ease monetary policy," senior deputy governor Miranda Goeltom told Reuters during a visit to Singapore.

Goeltom has been acting central bank chief since its governor Boediono stepped down to run as a vice president in the elections.

Bank Indonesia is due to review policy on Wednesday, when it is expected to cut its key interest rate by 25 basis points to 7 percent, extending its easing streak to support the economy.

The bank has slashed its key interest rate <BIPG> by 2.25 percentage points since December.

Indonesia's economy, one of the most resilient in Asia along with China and India, was likely to grow between 3.5-4 percent this year, with the slowdown moderating in the coming quarters thanks to strong domestic consumption, she said.

The government has forecast economic growth to slow to 3-4 percent in 2009 from 6.1 percent in 2008.

Southeast Asia's biggest economy grew 4.4 percent in the first quarter, the slowest annual pace in five years due to slower investment and shrinking exports.

A Reuters poll issued on Thursday showed Indonesia's inflation probably eased to 6.23 percent in May -- its weakest since Feb. 2008 as rupiah strengthens, creating room for the central bank to cut interest rates further.

COMFORTABLE WITH RUPIAH Inflation was heading towards the lower end of the 5-7 percent range targeted by the government for the full year, said Goeltom. She said another encouraging sign was the return of foreign players, whose investments have pushed up Indonesia's foreign exchange reserves and the rupiah's value, and such inflows were not seen as speculative, Goeltom said.

"We are quite comfortable with the movement in the rupiah. It has been strengthening but it has been strengthening for good reasons," she said.

The high-yielding rupiah <IDR=> has gained around 15 percent since early March, fuelled by tentative signs of recovery in the global economy. But analysts say the currency is vulnerable to any flare-up in global risk aversion.

The central bank would allow some flexibility in the rupiah going forward but would still move to curb sharp currency swings, Goeltom said.

"We will not run against the current. If there are good reasons for the rupiah to strengthen, we will allow it to strengthen, if there are good reasons for it to weaken, we will allow it weaken," she added.

The bank was exploring the possibility of a rupiah/yen currency swap deal with Bank of Japan, similar to the one signed with China's central bank earlier this year, she added.