Indonesia central bank surprises with rate cut

The logo of Indonesia’s central bank Bank Indonesia is seen on a window in the bank’s lobby in Jakarta on Tuesday. (Reuters photo)

JAKARTA – Indonesia’s central bank on Tuesday surprised markets by cutting its benchmark policy rate, the first change since October, in a bid to boost sluggish lending and economic growth.

Bank Indonesia (BI) cut the 7-day reverse repurchase rate to 4.5%. It also cut its two other main policy rates.

In a Reuters poll, 19 out of 20 economists had forecast that BI would hold the key rate at 4.75%.

“The theme of this monetary policy meeting was to lower the benchmark policy rate due to stability and to support economic recovery,” BI governor Agus Martowardojo said.

Mr Martowardojo said external risks, including the normalisation of the US Federal Reserve’s balance sheet, had been reduced.

Indonesia becomes the second major Asian economy to cut its policy rate this year. The first was India, on Aug 2.

“Today’s 25-basis-point rate cut is unlikely to be the last in the current cycle. However, concerns about the rupiah mean the pace of further easing is likely to be gradual,” Capital Economics said in a note.

Twice this month, after Indonesia announced that second quarter growth was basically unchanged from January-March, Mr Martowardojo flagged the possibility of monetary easing.

The last cut in the benchmark rate was in October, after which BI repeatedly said its policy stance was neutral as it kept watch of a number of global changes, including plans by the Federal Reserve to hike rates in the US and reduce its balance sheet.

In 2016, BI slashed the benchmark six times, by a total of 1.5 percentage points, and eased some lending rules in a bid to spur lending and economic growth.

In April-June, Southeast Asia’s largest economy grew 5.01% from a year earlier. That was the same as in the first quarter, and slower than market expectations and BI’s forecast, as private consumption remained lethargic.

June’s loan growth of 7.7% from a year earlier was the weakest in eight months.

Other Southeast Asian nations had higher growth in the second quarter than the first this year, boosted by solid exports. Indonesia’s exports have improved this year, but its growth depends far more on consumption than trade.

Since 2014, Indonesia’s annual growth has remained around 5 percent, well below President Joko Widodo’s target of 7%.

BI saw room to cut because of lower inflation, a healthy current account deficit outlook, fewer Fed rate hikes, BI deputy governor Perry Warjiyo said.

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