Indonesia cuts key interest rate for 3rd month in row

[JAKARTA] Indonesia's central bank cut its key interest rate for a third straight month and took a series of other steps to bolster growth amid a deepening global economic slowdown.

The seven-day reverse repurchase rate was lowered by 25 basis points to 5.25 per cent on Thursday, as predicted by 21 out of 28 economists surveyed by Bloomberg. The rest forecast no change. The bank also relaxed rules for property and vehicle loans as part of macroprudential measures to spur growth.

The latest round of easing, after the Federal Reserve lowered U.S. borrowing costs Wednesday, comes as trade tensions and now higher oil prices weigh on the global economy and threaten prospects for Indonesia, where growth is at a two-year low.

Thursday's move is "a preemptive step to support the momentum of domestic economic growth amid slowing global economic conditions," Bank Indonesia Governor Perry Warjiyo told reporters. "This policy is consistent with an estimate for inflation to remain low at below the midpoint of our target range and with the yield of domestic financial assets remaining attractive."

Indonesia raised interest rates by 175 basis points last year as it battled an emerging-market rout, but has since shifted focus to supporting economic growth. The government has already twice revised down its outlook for the economy for 2019, and now sees growth of about 5.1 per cent versus an initial forecast of 5.3 per cent.

Mr Warjiyo denied that the Fed cut affected Bank Indonesia's decision. The bank will maintain an "accommodate policy mix in line with low inflation forecasts" and "the need to continue to drive economic growth momentum," he said.

He said Bank Indonesia sees growth coming in at 5.1 per cent, below the midpoint of its 5 per cent-5.4 per cent forecast range for this year.

GROWTH CONCERNS

"Today's decision indicates that growth concerns are at the forefront for BI," said Krystal Tan, an economist at Australia & New Zealand Banking Group in Singapore.

"We continue to see scope for at least a further 25 basis points rate cut by end-2019. The recent improvement in the trade balance, which was driven by a sharp fall in imports and comes at the expense of growth, also supports the case for further easing," she said.

Wisnu Wardana, a Jakarta-based economist at PT Bank Danamon Indonesia, said the central bank had made clear it was looking to support growth as exports and investment weaken and loan growth slows. But he said there may now be a pause.

"As the Fed's new dot plot that was released earlier today indicated that the cutting cycle has almost ended, we think BI will take cautious steps from here on out," he said.

Indonesian policy makers remain concerned about the current-account deficit, which widened to 3 per cent of gross domestic product in the second quarter, although the small trade surplus last month may help to ease some of that pressure. Indonesia is reliant on foreign investors to finance the shortfall, making it vulnerable to outflows in times of volatility.

Inflation has been picking up, hitting 3.49 per cent in August compared to a year earlier. While that was the fastest pace since December 2017, price-growth remains within the central bank's target band of 2.5 to 4.5 per cent.

BLOOMBERG