BI “believes that this loosening will strengthen policies which the government is taking to grow the economy”, Governor Agus Martowardojo said.
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Bank Indonesia cut its benchmark interest rate a quarter percentage point to 5.0% on Thursday, to help spur the country’s fragile recovery, amid low inflation.
With the latest move, Bank Indonesia has cut borrowing costs by 1.25 percentage points so far this year, as the US central bank has declined to raise interest rates. Martowardojo said monetary easing may continue through early 2017.
He added that the inflation rate remains under control at 4 percent plus-or-minus 1 percent.
Capital Economics said the Fed’s signalling that it could raise rates by the end of this year would mean any further BI easing is likely to be gradual.
Of 23 analysts surveyed in a Reuters poll, 17 had expected BI to cut the benchmark by 25 basis points.
In addition to slashing its benchmark rate, BI has lowered the deposit facility rate by 25 basis points to 4.25 percent. In August, the bank adopted a new policy benchmark – the seven-day reverse repo rate – in a bid to offer a better guide to market rates than the overnight reference rate, known as Bank Indonesia rate. Indonesia’s economy in the third quarter is not as strong as the central bank previously expected as non-construction investment is not showing “significant improvements’ and fiscal stimulus is expected to remain limited, in line with the government’s change for the second half of this year”. BI isn’t certain growth can get back above 5 percent this year, with its latest forecast at 4.9-5.3 percent.
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Meanwhile, inflation came in at 2.79% year-on-year in August, the lowest level since December 2009 and below the bank’s target of 3-5%, which allows room for further monetary easing.
