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Bank Indonesia keeps reverse repurchase rates steady at 5%
INDONESIA'S central bank left its key interest rate unchanged while pumping more liquidity into the financial system to stimulate South-east Asia's largest economy.
Bank Indonesia kept the seven-day reverse repurchase rate unchanged at 5 per cent on Thursday, following four rate cuts this year. Banks' reserve requirement ratio was cut by 50 basis points, the first such decision since June.
"This looks like a balancing act," said Frances Cheung, head of Asia macro and strategy at Westpac Banking Corp in Singapore. "Keeping the policy rate unchanged reflects the focus on maintaining rupiah stability" while cutting the reserve ratio "fits into the objective of promoting credit expansion".
After 100 basis points of rate cuts since July, the central bank is taking a more cautious approach in providing stimulus to the economy, turning to additional instruments to spur lending.
With growth likely to remain subdued amid a sluggish global outlook, governor Perry Warjiyo said that there is still room for more policy easing, either through monetary levers or macroprudential tools. "Monetary policy remains accommodative and is consistent with controlled inflation in the target corridor," he told reporters in Jakarta. "Going forward, Bank Indonesia will monitor domestic and global economic developments in using its room to implement an accommodative policy mix."
The rupiah was little changed on the decision.
"There's nothing to suggest they're done with rate cuts. Our call remains for a full unwind of the 175 basis points of hikes from last year," said Mohamed Faiz Nagutha, a Singapore-based economist with Bank of America, which has forecast an additional 75 basis points of easing over the next few months.
After raising rates last year to curb a currency rout, Bank Indonesia has switched its focus to supporting growth amid a global slowdown and the US-China trade war. The central bank expects Indonesia's economy to grow 5.1 per cent this year.
Inflation remains subdued, with consumer-price growth at a six-month low of 3.1 per cent in October. The central bank said on Thursday that inflation for the full year is expected around 3.1 per cent, well within the target band of 2.5-4.5 per cent.
A surprise trade surplus of US$161 million in October eases pressure on the current account deficit, which has been a key risk for the rupiah. The currency is up 3.5 per cent against the US dollar in the past year, among the top performers in Asia, with the bank saying that it expects the currency to remain stable in line with fundamentals.
The reserve requirement ratio (RRR) for conventional banks was cut to 5.5 per cent from 6 per cent, and for Islamic banks to 4 per cent from 4.5 per cent, effective Jan 2 next year.
Mr Warjiyo said the RRR cut would add an additional 24.1 trillion rupiah (S$23.3 million) in liquidity for commercial banks and 1.9 trillion rupiah for syariah lenders. "Liquidity is sufficient," but there's a problem in terms of the distribution of liquidity between groups of banks, he said. He added that strong household consumption has kept the economy resilient, but falling imports of capital goods and raw materials show that production has not picked up significantly. BLOOMBERG