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Indonesia cuts interest rate for 6th time before Fed move
[JAKARTA] Indonesia's central bank cut its benchmark interest rate for a second month in a row, injecting stimulus into the economy before the US Federal Reserve moves to tighten policy.
Governor Agus Martowardojo and his board lowered the seven-day reverse repurchase rate to 4.75 per cent from 5 per cent on Thursday, as forecast by 12 of 26 economists surveyed by Bloomberg. The rest had predicted the benchmark rate would remain unchanged.
Bank Indonesia has cut interest rates six times this year to boost an economy that continues to undershoot President Joko Widodo's growth target of 7 per cent set two years ago when he came to office. Policy makers in Southeast Asia's biggest economy found more reason to ease with inflation remaining near the lower end of the 3 percent to 5 percent target band and expectations mounting that the Fed will raise rates in December, possibly undermining the currency.
"They were always going to try to be opportunistic with a window still open given the possibility the Fed could hike in December, plus the fact that fundamentally speaking, inflation although ticking higher, is still within the target," said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore.
Bank Indonesia said third-quarter economic growth will probably be lower than initially expected, while expansion for the year will be closer to the lower end of the forecast range of 4.9 per cent to 5.3 per cent. Inflation will also be at the lower end of its target band, it said.
Juda Agung, executive director for economic and monetary policy, said the Fed will probably raise interest rates in December.
"Based on our assessment it will not be more than one" increase, Agung told reporters. "It can be in November, but more likely in December. If it's being done in December, we see the impact as not too significant as it's already priced in by the market." The central bank adopted the seven-day reverse repurchase rate as its new benchmark in August to add impetus to its policy decisions, and while it's seen some success with borrowing costs in the economy easing, commercial lenders aren't passing on all the rate cuts because of an increase in bad debts.
Mr Paracuelles said the slow response from lenders in passing on rate cuts from the central bank was a key factor.
"That's always going to be their focus, to try and improve the transmission and that doesn't happen overnight," he said.
The Jakarta Composite Index closed down 0.1 per cent before the decision. The rupiah erased earlier gains to trade unchanged at 13,008 a dollar after the decision, according to prices from local banks and the yield on the nation's 10-year bonds fell 2 basis points to 7.133 per cent, Inter Dealer Market Association prices show.