Key rate trimmed to spur lending

JAKARTA: Indonesia’s central bank, moving while inflation is the lowest in years and as the Federal Reserve stood pat, escalated efforts to spur lending by cutting its benchmark interest rate for the fifth time this year.

Bank Indonesia (BI) trimmed the 7day reverse repurchase rate, a new benchmark that it fully adopted last month, by 25 basis points to 5.00%.

The central bank also cut the rate it gives banks for overnight deposit and the rate it charges banks for borrowing a night by the same amount. They are now at 4.25% and 5.75%, respectively.

BI “believes that this loosening will strengthen policies, which the government is taking, to grow the economy,” governor Agus Martowardojo said.

Analysts said the stars were aligned for the central bank to cut, especially after the Fed’s decision and lesshawkish comments about the pace of future hikes in US interest rates.

“Subdued inflation, along with stability in both the current account deficits and exchange rates, has created policy space for rate cuts,” said Weiwen Ng of ANZ, adding that there could be more easing ahead.

In a Reuters poll, 17 of 23 analysts predicted BI would cut the benchmark yesterday.

In August, BI changed its benchmark to the seven-day reverse repurchase rate in a bid to better transmit monetary policy to the market.

Earlier this year, BI cut its thenbenchmark, the 12-month reference rate, four times to try to get banks to lend more and speed up sluggish economic growth.

The effects of the previous cuts have been limited, with the latest data showing loans by commercial banks as of July expanding at the weakest pace since November 2009 on an annual basis.

In the past, a high inflation rate has been a key factor making BI raise rates, and then be reluctant to lower them.

But this year, inflation has been very low. In August, the annual inflation rate was 2.79%, the lowest since December 2009 and below BI’s 3-5% target range.

The rupiah strengthened yesterday, after the Fed statements, and is up about 5.30% against the dollar this year. – Reuters