BI cuts key rates to help spur economic growth

JAKARTA: Indonesia’s central bank, which resisted cutting its benchmark interest rate for months, did so yesterday in a bid to lift an economy growing at its slowest rate in six years.

The benchmark policy rate was lowered by 25 basis points to 7.25%, while the overnight deposit facility rate and lending facility rate were also cut by the same amount to 5.25% and 7.75% respectively.

The last time the benchmark rate was changed was in February, when it was reduced by 25 basis points to 7.50%.

The decision was announced hours after explosions and gunfire in central Jakarta less than two kilometres from where Bank Indonesia (BI) was holding its first policy meeting of 2016.

Ten of 16 analysts in a Reuters poll had predicted a rate cut.

Some analysts expect the cut will be the first in an easing cycle. BI said it would assess the need for further monetary policy loosening in future.

The rupiah, whose stability has been a prime concern for BI, weakened after the Jakarta attacks and strengthened slightly after the rate cut announcement.

Economists welcomed the rate cut. “The move should provide a long-overdue boost to the struggling economy,” said Daniel Martin at Capital Economics in Singapore.

At policy meetings since October, BI has said it saw widening room to loosen monetary policy, but it had refrained from cutting its benchmark rate ahead of the Federal Reserve’s first US rate hike in nearly a decade.

BI was concerned lower domestic rates could spark capital outflows and weaken the fragile rupiah.

In 2015, the rupiah was Asia’s secondworst performing currency, falling by 10% against the dollar and touching 17-year lows.

But in the fourth quarter, it was best performing one with a 6.2% jump. It has not been as badly hit as many other currencies by the early 2016 emerging market rout.

The easing of annual inflation to a sixyear low of 3.35% in December has provided room for the rate cut.

Growth in Southeast Asia’s largest economy is expected at the bottom of BI’s target range of 4.7-5.1% in 2015, making it the slowest since 2009.

The central bank has said 2016 growth is expected at 5.2-5.6%.

Earlier yesterday, South Korea’s central bank kept rates unchanged at record-low 1.50%, but then went on to cut this year’s economic growth forecast.

The bank reduced its growth forecast to 3.0% from the 3.2% it predicted three months ago.

Hours after the Indonesia cut, Bangladesh’s central bank cut its key policy rates by half a percentage point for the first time in nearly three years to help spur economic growth.

The central bank lowered the repo rate, which it uses to inject money into the banking system, to 6.75%, and reduced the reverse repo rate, through which it absorbs excess cash from banks, to 4.75%.