You are here

Indonesia central bank lowers key rate again in bid to lift growth

[JAKARTA] Indonesia's central bank, trying to help speed up sluggish economic growth, on Thursday cut its benchmark interest rate for the second time this year and lowered the banking sector's reserve requirements in another easing move.

Thirteen of 19 economists surveyed by Reuters had predicted Bank Indonesia (BI) would cut its key rate by 25 basis points to 7.00 per cent, following a trim in January of the same size.

BI kept rates unchanged for nearly all of 2015 as it sought to battle high inflation and support the country's fragile rupiah.

The central bank also lowered its overnight deposit rate, known as the Fasbi, by 25 basis points to 5 per cent, and slashed commercial banks' rupiah reserve requirements by a hefty 100 basis points in a move expected to boost liquidity by 34 trillion rupiah (US$2.52 billion).

"Policy rate cut makes sense when inflation impetus is mild, while the reserve requirement cut is also done with liquidity in mind," said economist Wellian Wiranto at OCBC in Singapore. "Overall, given the space provided by the dovish Fed, it's a good move by BI that should go down well in market."

Indonesia is not the only Asian economy that easing policy to try to boost growth. Japan has introduced negative interest rates, Taiwan and Bangladesh have cut rates and others are expected to this year amid global growth worries.

Southeast Asia's largest economy grew 4.8 per cent last year, the fifth year of slowing growth and the weakest in six years. But growth accelerated in the final quarter in what many see as a sign of upward momentum.

Perry Warjiyo, a BI deputy governor, said combining the rate cuts and the lower reserve requirement would "make the effect stronger and faster" as was part of a policy of supporting growth while maintaining stability.

The rupiah weakened more than 10 per cent against the dollar in 2015, making it emerging Asia's second worst-performing currency.

This year, it has risen nearly 2.5 per cent against the dollar while Indonesia's stock market has outperformed regional peers.

In a Reuters poll published Thursday, currency traders and analysts turned bullish on the rupiah for the first time since November 2014.

Economists note the annual inflation rate has been near the midpoint of BI's 3-5 per cent target range, giving it room to cut. In January, inflation was 4.14 per cent, significantly lower than the average during 2015 but higher than December's 3.35 per cent.