Bank Indonesia cuts rates again

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 sevenday reverse repurchase rate, a new benchmark that it fully adopted last month, by 25 basis points to 5%.

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 less-hawkish 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, the central bank cut its then-benchmark, 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.

Indonesia’s economic growth rate last year fell to 4.8%. BI isn’t certain growth can get back above 5% this year, with its latest forecast at 4.9-5.3%.

Meanwhile in Manila, the Philippines central bank held policy interest rates steady yesterday as economic growth remained healthy, and it lowered its inflation forecast slightly for this year.

As expected, the policy-making Monetary Board kept the benchmark interest rate at 3% and maintained the floor and ceiling rates in its rate corridor at 3.5 and 2.5%, respectively.

“While global economic conditions have remained subdued since the previous meeting, trends in domestic economic activity showed sustained fairness,” Bangko Sentral ng Pilipinas governor Amando Tetangco told a media briefing.

All 12 analysts in a Reuters poll had predicted the rate would be left unchanged as inflation remains subdued even as the economy gallops ahead at the secondstrongest pace in Asia after India.

But some see a strong chance of a rate increase next year as inflation is expected to creep up due to the fading impact of lower oil prices.

The central bank lowered its average inflation forecast for 2016 to 1.7% from 1.8%, but maintained its 2.9% inflation projection for 2017.

Annual inflation has averaged 1.5% in the eight months to August, below the central bank’s 2-4% target for this year and next, as fuel and food prices have largely remained tame.