Indonesia’s central bank on Friday (22/09) cut its main interest rate for the second consecutive month, wrong footing most analysts as it seeks to support sluggish lending and consumption holding back growth in Southeast Asia’s biggest economy.
Policymakers in Indonesia have been struggling to lift the economic growth rate, which has remained around 5 percent in each of the past four quarters.
“The rate cut is clearly aimed at boosting the economy, which has struggled over the past few years,” said Gareth Leather, senior Asia economist at Capital Economics.
Bank Indonesia (BI) cut the benchmark seven-day reverse repurchase rate by 25 basis points to 4.25 percent, following its first cut since October 2016 last month.
Twenty of 26 analysts in a Reuters poll had expected the central bank to hold rates on Friday, while the remaining six forecast a cut.
BI has now cut the benchmark rate by 200 basis points since the start of 2016.
The central bank had taken into account a potential US rate hike and balance sheet normalization by the Federal Reserve when it decided to cut rates, said BI executive director Dody Budi Waluyo. He said BI would continue to monitor other external risks, such as credit rating downgrades in China.
The monetary easing should help boost the pace of bank lending and would not risk reigniting inflationary pressures, said Dody.
“The cut is still consistent with the realization and expectation of low inflation in 2017,” he said, adding that 2018 and 2019 inflation would also fall below the mid-point of the range.
Indonesia’s annual headline inflation slowed to 3.82 percent in August, down from 3.88 percent a month earlier. In the second quarter, the economy grew 5.01 percent from a year earlier, the same as in the previous quarter, blunted by weaker than expected household consumption, the biggest contributor to Indonesia’s gross domestic product.
On Thursday, three Asian central banks – Japan, Philippines and Taiwan – kept their monetary policies unchanged.
Further Indonesian monetary easing would depend on inflation and the rupiah’s stability against the US dollar, Dody said. The rupiah has gained 1.2 percent against the US currency so far this year and traded in an exceptionally narrow band.
Maybank Indonesia’s economist, Myrdal Gunarto, said the rate cut could be the last for this year as “external pressures will begin to intensify” when major central banks around the world begin to tighten their monetary policy.