Indonesia Cuts Interest Rates for Third Straight Month

Jakarta, 08 Jumadil Akhir 1437/18 March 2016 (MINA) – Indonesia’s central bank cut interest rates for the third time this year, taking advantage of a likely delay in U.S. policy tightening and slowing inflation at home to offer more support for the domestic economy.

Bank Indonesia on Thursday trimmed its benchmark BI rate by a quarter of a percentage point to 6.75%. It also cut its deposit facility and its lending facility by a quarter percentage point each to 4.75% and 7.25%, respectively, Mi’raj Islamic News Agency (MINA) reported, quoting the Wall Street Journal.

“Bank Indonesia will be more cautious in deciding further rate cuts,” spokesman Tirta Segara said after the latest monthly meeting of the central bank’s policy-setting board.

Mr. Segara said Bank Indonesia will focus more on managing money supply, suggesting that reducing interest rates isn’t the main tool it will use to help drive economic growth.

Eight out of 13 economists polled by The Wall Street Journal had expected the bank to cut its benchmark rate by 0.25 percentage points. Economists who forecast a rate cut cited the slowing level of inflation within the central bank’s target range of 3%-5%, and an improvement in investor sentiment fueled by progress in official efforts to reform the economy.

But even the economists who expected the bank to hold fire said a rate cut wouldn’t come as a surprise, given uncertainty about the recovery in the U.S.

While they expected the bank to digest the effects of two earlier cuts and a loosening of commercial bank lending requirements before taking action, they said a likely delay in Federal Reserve moves to raise U.S. rates offered a window of opportunity. Federal Reserve officials said Wednesday they wouldn’t likely raise interest rates as swiftly as
previously expected.

Like many other central banks, Bank Indonesia takes the U.S. rate direction into consideration when deciding policy, given the implications for capital flows in and out of the Asian nation and the exchange rate of its currency.

The central bank has also been closely monitoring the near-term risk of a further devaluation in the Chinese yuan, though the likelihood of this has diminished since People’s Bank of China Gov. Zhou Xiaochuan said last month there was no basis for further yuan depreciation.

Economists are split over how low Bank Indonesia might take rates this year. Some of them said a cut on Thursday would be the last for this year, while others expect it to cut the BI rate to 6.5% by the end of the year provided inflation remains below 5%. (R07/R01)

Mi’raj Islamic News Agency (MINA)