Aloysius Unditu – Indonesia's inflation slowed to a nine-month low and exports fell the most in seven years, prompting speculation that the central bank will cut interest rates this week.

Consumer prices rose 9.2 percent in January from a year earlier, after gaining 11.1 percent in the previous month, the Central Statistics Bureau said in Jakarta today. Overseas sales plunged 20 percent in December from a year earlier, the biggest decline since 2001.

Bank Indonesia may reduce its policy rate for a third straight month to boost domestic consumption as a global recession crimps demand for exports. Governor Boediono on Jan. 30 said the "downside risk" to growth is increasing and the economy may expand as little as 4 percent this year, the weakest pace since 2001.

"With growth concerns now at an elevated level against a backdrop of softening inflation and more importantly rapidly declining inflation expectations we look for the central bank to cut," said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. She expects the key interest rate to be reduced to 7 percent by the second quarter from 8.75 percent.

Indonesia's benchmark share index extended losses after the announcement, declining 2.4 percent at 3:11 p.m. in Jakarta. The rupiah lost 1.6 percent to 11,625 against the dollar.

Local demand accounts for about three-fourths of the Indonesian economy, the largest in Southeast Asia.

Indonesia forecasts inflation will slow to between 5 percent and 6 percent by August, Finance Minister Sri Mulyani Indrawati said at a briefing in Jakarta today.

Interest rates

Bank Indonesia next meets to decide on interest rates on Feb. 4. The central bank may lower borrowing costs by a half point to 8.25 percent, according to 18 of 21 economists in a Bloomberg News survey.

Indonesia last month cut fuel prices for a third time since Dec. 1, helping counter an increase in the price of rice, Rusman Heriawan, head of the statistics agency said on Jan. 30.

Consumer prices fell 0.07 percent in January from a month earlier after declining 0.04 percent in December. Core inflation, excluding fuel prices, slowed to 7.39 percent.

"The government has been proactive in cajoling businessmen to lower prices on the back of lower domestic gasoline prices," said Andry Asmoro, an economist at PT Bahana Securities in Jakarta. It's "imperative the government ensures sufficient supplies of priced-regulated commodities such as kerosene" and liquefied petroleum gas in an election year, he said.

Exports dropped to $8.7 billion in December, the statistics agency said. Imports from outside trade zones fell 7.5 percent in December to $6.29 billion, from $6.8 billion a year earlier. The nation's trade balance widened to $992 million.

"Exports will continue to be weak this year," said Purbaya Yudhi Sadewa, chief economist at Danareksa Research Institute in Jakarta. "It's important the government creates a fiscal stimulus and implements it clearly."

Japan, the biggest buyer of Indonesian goods, the US and other advanced economies may shrink 2 percent this year, according to the International Monetary Fund.