Indonesia surprises with second rate cut to support growth

[JAKARTA] Indonesia cut interest rates for a second straight month to spur an economy facing increasing risks from a global slowdown and intensifying trade war.

Bank Indonesia lowered its seven-day reverse repurchase rate by 25 basis points to 5.5 per cent on Thursday, a move predicted by only 13 of the 34 economists surveyed by Bloomberg. The majority expected the bank to keep policy unchanged after it lowered rates for the first time in almost two years in July.

Governor Perry Warjiyo said the rate cut was consistent with the bank's low inflation forecast and serves as a "preemptive measure to push economic growth momentum in the future." The move also retains the attractive yield on domestic assets, he said.

Indonesia is using a mix of monetary and fiscal policy to stimulate Southeast Asia's biggest economy after growth slowed to a two-year low in the second quarter. Low inflation and the Federal Reserve's dovish policy outlook is giving Bank Indonesia room to reverse some of last year's rate hikes.

"Indonesia is lucky with its continuing economic growth momentum, but we must take anticipative, preemptive steps in facing the risks of a slowing global economy," Mr Warjiyo said.

Central banks in emerging markets like India, Brazil and Russia - and, closer to home, Thailand, Malaysia and the Philippines - have all cut rates this year to reignite growth.

The Jakarta Composite Index rallied immediately after the rate cut, but was down 0.1 per cent as of 2:53pm local time.

Mr Warjiyo said the central bank will "continue its accommodative policy mix." It sees growth for this year below the government's projection of 5.2 per cent, while inflation will probably come in below the midpoint of the 2.5 per cent to 4.5 per cent target band.

"It seems that growth worries have taken on a greater urgency," said Eugene Leow, a fixed income strategist at DBS Group Holdings. "And with many central banks across the world easing, BI probably felt comfortable enough to follow suit."

Indonesia's rate cut complements President Joko Widodo's plans - outlined in his budget last week - to boost growth to 5.3 per cent next year through record spending of US$178 billion and tax incentives to businesses. The economy grew 5.05 per cent in the second quarter, a far cry from the 7 per cent growth the president targeted in his first term.

Most economists predicted the central bank would keep rates on hold this month given heightened market turmoil and a widening in the current account deficit. The rupiah has slumped almost 2 per cent against the dollar in the past month, though it's still among a handful of gainers in Asia this year.

Inflation at 3.32 per cent in July was well within the central bank's target band.

BLOOMBERG