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Stocks

Shares hit record highs as rupiah slides

Indonesia's stock market roared after Bank Indonesia cut interest rates for the first time in three years.

JAKARTA -- Indonesian shares rose to record highs and the rupiah tumbled against the U.S. dollar on Wednesday after Bank Indonesia, the central bank, unexpectedly cut the policy interest rate for the first time in three years in an effort to revive growth.

     The benchmark Jakarta composite index (JCI) closed 1% higher at 5390.45 after touching an all-time high of 5415.38 in morning trading and breaching the 5400 mark for the first time.

     Shares of big banks led the gains with Bank Mandiri, Indonesia's largest lender by assets, up 1.9% and Bank Rakyat Indonesia up 4%.

     On Tuesday, Bank Indonesia cut its interest rate 0.25% to 7.5%. The global slump in oil prices has eased inflation concerns, providing an opportunity for stimulus measures after growth fell to a five-year low in 2014. Analysts hope the move will result in lower interest on bank deposits and ramp up lending.

     "At [the end of] November 2014, the banking industry experienced net interest margin pressure," said Teguh Hartanto, a banking analyst for Bahana Securities, in a research report. "This pressure is, however, likely to ease going forward given the recent lower BI Rate."

     Property developers Ciputra Development and Bumi Serpong Damai both surged over 5% on hopes that the BI Rate cut will enable homebuyers to get less expensive mortgages. Some analysts say a further rate cut is possible, and this might shift capital from deposits into higher yielding assets such as property.

     Meanwhile, fresh concerns were raised over import costs as the rupiah slipped to around 12,850 on the US dollar, a two-month low. Shares of Unilever Indonesia, the local unit of household goods giant Unilever, dropped 1.1% and Kalbe Farma, the country's largest pharmaceutical company, ended 0.3% lower. Both companies rely on imported raw materials for some of their products.

     Some analysts argue that a lower BI Rate will encourage a flight of capital given the U.S. Federal Reserve's hike of interest rates. At a press conference on Tuesday, Central Bank Governor Agus Martowardojo noted benefits of a weak rupiah include reducing imports and improving the balance of trade.

     Mandiri Sekuritas said in a research report that normalization of U.S. monetary policy and thin foreign exchange transactions will continue to put downward pressure on the rupiah.

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