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Growth risks spur Bank Indonesia to adopt new key rate

Indonesia's central bank is taking more decisive steps to stimulate lending after three interest-rate cuts this year failed to do the job.

[JAKARTA] Indonesia's central bank is taking more decisive steps to stimulate lending after three interest-rate cuts this year failed to do the job.

Bank Indonesia will outline plans on Friday to use the seven-day reverse repo rate - the rate it pays to borrow from commercial lenders - as its main policy instrument, according to people familiar with the program who asked not to be named. That rate is currently at 5.5 per cent and compares with the current benchmark 12-month reference rate of 6.75 per cent.

Policy makers have come under pressure from the government to spur Southeast Asia's biggest economy amid falling exports and weaker commodity prices. Even though the central bank lowered its key rate at every meeting this year by a cumulative 75 basis points, officials have noted that lending rates in the economy didn't fall by the same magnitude.

"It is under a lot of pressure," Trinh Nguyen, an economist at Natixis Asia Ltd in Hong Kong, said by phone. "The government is pro-growth and wants to see lending rates fall, which they haven't yet."

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Central banks from Japan to Europe are seeking more ways to stimulate their economies and protect against global shocks. The Monetary Authority of Singapore on Thursday unexpectedly eased its policy stance as economic growth ground to a halt.

In Indonesia, the economy grew at its slowest pace last year since the end of the global financial crisis in 2009. President Joko Widodo said in an interview on Feb 11 that he wanted interest rates to "fall, fall, fall, fall and keep falling" so the country can better compete with its neighbors.

The central bank's move may give it more room to influence market interest rates, according to Wellian Wiranto, an economist in Singapore at Oversea-Chinese Banking Corp. The reference rate isn't directly tied to money markets.

Juda Agung, the executive director of monetary policy at Bank Indonesia, said at the most recent rate meeting in March that monetary policy has a weak transmission to financial markets. Lending rates only declined by 4 basis points, despite the central bank's policy easing, he said.

Mr Wiranto said the change doesn't mean an easing in monetary policy even though the seven-day repo rate is lower than the reference rate. Bank Indonesia is also likely to keep the latter unchanged until August, when it's due to adopt the new benchmark, he said.

"One key thing they are going to highlight on Friday is that even though we are moving to a new framework, it doesn't mean a rate cut," he said by phone.

"This is about transmission. It is not a stealth rate cut."


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