Indonesia pledges more rate cuts as it moves to spur growth

Jakarta

INDONESIA'S central bank cut its benchmark interest rate for the first time in almost two years and pledged more easing to come as it shifts focus to supporting growth in South-east Asia's biggest economy.

The seven-day reverse repurchase rate was lowered by 25 basis points to 5.75 per cent on Thursday, in line with the forecasts of most economists surveyed by Bloomberg.

The decision came hours after a similar move from South Korea's central bank and after dovish signals from the Federal Reserve that it will cut interest rates for the first time in a decade in July. It underscores central bankers' concerns about a worsening global economy and mounting trade tensions.

"Bank Indonesia sees that the room is still open for accommodative monetary policy that is in line with the low inflation estimate and the need to push economic growth momentum further," governor Perry Warjiyo said in Jakarta.

After raising interest rates by 175 basis points in 2018 to stem an emerging-market rout, Bank Indonesia has proceeded cautiously this year to avoid destabilising the currency. With the rupiah gaining this year and concerns about the current-account deficit moderating, Mr Warjiyo is turning his attention to spurring growth.

Weaker global demand and a fallout from the US-China trade war are increasingly weighing on Indonesia's prospects.

The government has trimmed growth forecasts for this year, while the central bank expects the expansion will probably be below the midpoint of its 5 per cent to 5.4 per cent forecast range.

Mr Warjiyo said a prolonged trade war would mean "downside risks" to the bank's forecast for growth next year of 5.1 per cent to 5.5 per cent. "With this interest rate cut, all of Bank Indonesia's policies are indeed aimed at maintaining economic growth momentum," he said.

Bank Indonesia's first cut since September 2017 may just be the beginning of an easing cycle that could push the benchmark rate down to 5 per cent by the end of the year, according to Morgan Stanley. Still, there's reason for the central bank to tread more cautiously given Indonesia's reliance on foreign inflows to fund the current-account deficit.

Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore, said this is probably a "mini easing cycle" with more rate cuts to come given low inflation.

"We see more for sure," he said, forecasting 75 basis points of easing this year including Thursday's move. "It was always a matter of time, not if."

The rupiah pared gains to 0.2 per cent after the decision while the benchmark Jakarta Composite Index of stocks rose 0.1 per cent, snapping two days of losses.

The yield on 10-year government bonds fell one basis point to 7.13 per cent.

Price pressures remain subdued, giving policymakers room to move. While core inflation accelerated to its highest level in more than two years in June, the headline measure is well within the central bank's target band of 2.5 per cent to 4.5 per cent.

Mr Warjiyo said inflation will be low for the rest of the year, forecasting it below the midpoint of the 2.5-4.5 per cent target.

"The statement only seemed marginally dovish than before, which again speaks of Bank Indonesia keeping a close watch on external risks and the top priority of its objective of maintaining stability," said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore. BLOOMBERG