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Economy

Bank Indonesia carries out third rate cut in three months

Benchmark lowered 25 basis points to 5.25% to stimulate flagging growth

Bank Indonesia's headquarters in Jakarta: The central bank has veered from aggressive tightening to a streak of three rate cuts.   © Reuters

JAKARTA -- Indonesia's central bank on Thursday announced its third rate cut in as many months, demonstrating its resolve to get ahead of a slowing global economy amid the U.S.-China trade conflict.

Bank Indonesia slashed its benchmark seven-day reverse repo rate by 25 basis points, to 5.25%, in line with the predictions of 13 out of 21 economists polled by Reuters over the past week.

"This is a preemptive measure to push for economic growth momentum that has been slowing," Gov. Perry Warjiyo told a news conference the same day. "We see that the continuing U.S.-China trade tension, followed by geopolitical risks, keep pressuring the global economy" and creating uncertainty.

Warjiyo said the BI has slashed its global economic growth forecasts for both this year and next year to 3.1%, from 3.2% and 3.3%, respectively.

Supported by stable inflation and a steadier rupiah -- as well as continuing capital inflows and current account deficits predicted to hover between 2.5% and 3% -- Indonesia's economy is forecast to expand 5.1% this year. That is at the lower range of Bank Indonesia's growth target of 5% to 5.4%, but higher than the 5.05% growth recorded for the second quarter, the slowest pace in two years.

"Capital inflows to emerging economies are continuing, and to Indonesia especially it remains high. But the global dynamics need to be watched and well-anticipated, as they may affect efforts to grow the economy and maintain capital inflows [needed] to support external resilience," Warjiyo said.

Bank Indonesia's latest cut comes during an easing cycle by central banks around the world.

On Wednesday, as expected, the U.S. Federal Reserve cut its target interest rate by 25 basis points to a range of 1.75% to 2%. This came after a Fed rate cut in July, which was its first in 10 and a half years.

The European Central Bank last week cut its deposit rate by 10 basis points to a record low of minus 0.5%, and promised that rates would remain low for some time. The ECB also said it would restart bond purchases at a rate of 20 billion euros ($22 billion) a month from Nov. 1.

Bank Indonesia announced Thursday's cut after slashing its policy rate for the first time in nearly two years in July. The bank had been in an aggressive tightening phase last year: It raised rates by a total of 175 basis points to shore up the rupiah and curb capital outflows as the Fed also tightened and investors grew anxious about the trade war.

This time, Warjiyo also announced measures to fuel loan growth through a relaxation of the so-called macroprudential intermediation ratio for the banking industry -- a move to increase banks' financing capacity -- and an easing of the loan-to-value ratio for property and vehicle loans.

"Next, Bank Indonesia will continue with its accommodative policy mix in line with a low inflation projection, external resilience and the need to keep pushing for economic growth momentum," Warjiyo said, hinting that another rate change might be in store.

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