Jakarta cuts rates for fourth time

An Indonesia vessel after taking exports across the Pacific. Source: Wikimedia

The Indonesian central bank has cut its benchmark interest rate for the fourth time during 2016, indicating its willingness to back growth despite choppy financial waters.

Governor Agus Martowardojo and his board have sliced the reference rate by 25 basis points to 6.5 per cent after financial markets closed this Thursday.

The bank’s communications boss Tirta Segara said it was hoped the latest rate cut would speed up growth across the economy, which was still expanding at its slowest pace since the global financial meltdown.

“This cut is expected to strengthen domestic demand to further improve economic growth, while maintaining broader economic stability amid a weak global economy,” Segara announced.

Jakarta is easing rates again following a drop in the inflation rate to its lowest level in more than six years in May. With uncertainty surrounding Europe with the British referendum on June 23 and the US interest rates, Bank Indonesia is looking for ways to bolster risk aversion.

The financial authorities have eased macro-prudential limits to boost lending, increasing the minimum loan-to-funding ratio to 80 per cent from 78 per cent, relaxed rules on property deals and cut the minimum deposit required to buy a home.

A Bank Indonesia statement said: “Economic recovery in Europe is going moderately and shadowed by risk of Brexit, which has the potential to add tension to global financial markets.”

“Growth is slower and inflation is expected to stay subdued,” said Euben Paracuelles, an economist with Nomura Singapore. The Federal Reserve’s indication it would “delay hikes is a big policy consideration,” he added. “This gave Bank Indonesia the opportunity to deliver a rate cut.”

The central bank has also cut its seven-day reverse repo-rate, set to become the benchmark interest rate in two month, by 25 basis points to 5.25 per cent.

The archipelago’s inflation is forecast to reach the midpoint of the 3-per-cent to 5-per-cent target by the end of 2016, Bank Indonesia announced. It forecast the economy would probably expand by around 5 per cent in the second quarter, compared with 4.9 per cent in the previous three months.

Juda Agung, the central bank’s executive director of monetary policy, told the media that the outlook for the second quarter remained under pressure because of weak private investment from non-construction industries.

“Easing might not be done going forward, but essentially speaking, Bank Indonesia’s stance is accommodative,” Agung added. “Because the easing move today is big, both on the monetary and macro-prudential sides, but essentially, our stance currently remains accommodative.”