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Indonesia central bank may cut rates again soon if markets stabilise: deputy governor

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Indonesia's central bank may be able to cut its benchmark interest rate again if financial markets stabilise, a senior bank official said on Thursday, adding that recent turbulence due to fears of a currency war should be temporary.

[JAKARTA] Indonesia's central bank may be able to cut its benchmark interest rate again if financial markets stabilise, a senior bank official said on Thursday, adding that recent turbulence due to fears of a currency war should be temporary.

"If we look at the turmoil in the past two days, the rupiah is already improving and the financial markets too ... If this is maintained, we hope our interest rate can be lowered," Dody Budi Waluyo, a member of Bank of Indonesia's (BI) board of governors, told Reuters in an interview.

Last month, the bank trimmed its key policy rate by 25 basis points (bps) to 5.75 per cent to support economic growth, the first reduction in nearly two years and ahead of the US Federal Reserve's July rate cut.

The exact timing of the next BI cut would depend on an assessment during a policy meeting, Mr Waluyo said. However, if risks are measurable, BI will "set the timing for a cut in interest rates in the near future," he said.

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The next meeting is on Aug 21-22.

Analysts have predicted July's cut was the beginning of an easing cycle to unwind BI's tightening in 2018. BI last year raised rates six times by 175 bps to halt capital outflows related to US rate hikes and the US-China trade war.

Markets went into a tailspin on Monday after China let its currency weaken beyond 7 yuan per dollar, a surprise move that investors took as retaliation for US President Donald Trump's announcement of more tariffs on Chinese imports.

The rupiah fell as much as 1.7 per cent this week, after Mr Trump's tariff announcement, to its weakest since June, at 14,350 a dollar. It has since recovered and closed at 14,205 on Thursday, appreciating slightly from the previous session.

"It's lucky that (China) conducted yuan fixing," Mr Waluyo said. "They held the depreciation within a deviation limit. For now, it's safe, but we don't know how much more tariffs will be imposed on China."

BI is preparing in case there is a full-blown trade war between Beijing and Washington, including a scenario of both side slapping retaliatory tariffs and a currency war, which could drag down emerging market currencies, Mr Waluyo said.

He said central banks in other countries, including Australia, India, New Zealand and Thailand, had also cut rates, which he took to mean they all had felt the impact of the trade war.

An Indonesian rate cut may reduce bond returns, but raises the prospect of higher economic growth that could draw in equity investors, he said.

Based on current yield differentials with assets in other economies, Indonesia can still attract investors in both bond and stock markets even with more cuts to the policy rate, he said.

Mr Waluyo said Indonesia's 5.05 per cent economic growth in the second quarter was "good enough", compared to other emerging markets. He forecast full-year GDP growth closer to the bottom end of BI's official 5.0-5.4 per cent outlook, "maybe close to 5.1 per cent".

However, a prolonged softness in exports could weaken domestic consumption and investment, Mr Waluyo warned.

REUTERS