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22 September 2019

Indonesia cuts key rate for third month in a row

The latest round of easing, after the Federal Reserve lowered US borrowing costs 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.

bloomberg/Dimas Ardian

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, reported Bloomberg.

The seven-day reverse repurchase rate was lowered by 25 basis points to 5.25 per cent among other several macroprudential measures to spur growth.

Perry Warjiyo, the Governor of Bank Indonesia, said that the move is a pre-emptive step to support the momentum of domestic economic growth amid slowing global economic conditions.

 “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,” says Warjiyo.

Indonesia raised interest rates by 175 basis points last year as it battled an emerging-market rout but has since shifted focus to supporting 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.

Warjiyo said that the Fed cut had not affected Bank Indonesia’s decision, adding that the central bank will maintain an accommodate policy mix in line with low inflation forecasts as well as the need to continue to drive economic growth momentum.

The Governor said that the central bank projects growth at 5.1 per cent this year, below the midpoint of its fiver to 5.4 per cent forecast range.

Indonesian policymakers remain concerned about the current-account deficit, which widened to three per cent of GDP in Q2 2019, although a small trade surplus last month may help to ease some of that pressure.

The South Asian country is reliant on foreign direct investment to finance the shortfall, making it vulnerable to outflows in times of volatility.

The central bank also said that loans with maturities above one year can be considered a financing source for banks, allowing them to access an additional IDR 128 trillion ($9.1 billion) in financing.

The step, limited to banks with less than five per cent of non-performing loans on their books, should allow them to cut lending and deposit rates, said Warjiyo.






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