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Economy

Bank Indonesia surprises with second rate cut in two months

Central bank lowers its benchmark by 25 basis points to 5.5%

A Reuters poll showed that 17 of 19 economists expected the bank to keep its key rate on hold.   © Reuters

JAKARTA -- Indonesia's central bank announced a surprise cut to its policy rate on Thursday, citing the need to move the economy after the country logged its slowest growth in two years.

Bank Indonesia cut its benchmark seven-day reverse repo rate by 25 basis points to 5.5%, the second rate cut in two months -- after slashing it for the first time in nearly two years in July.

A Reuters poll on Tuesday showed that 17 of 19 economists expected the bank to keep its key rate on hold.

"This is a preemptive measure to [anticipate] the possibility of global slowdown... and to safeguard [Indonesia's] economic growth momentum," Bank Indonesia Gov. Perry Warjiyo told a news conference after the bank's August policy meeting. "The twice rate cuts... are aimed at encouraging demand for financing from corporates and households. Rate cuts will lower corporate costs and increase investment, [therefore] encouraging growth," he added.

Indonesia's gross domestic product grew 5.05% in the second quarter of the year, the Central Statistics Agency announced earlier this month. Although the growth rate was broadly in line with the annual average of 5% in recent years, the expansion was the slowest in two years.

Last year, the central bank raised its benchmark rate by a combined 175 basis points to shore up the rupiah, which had fallen to a 20-year low against the dollar amid Fed monetary tightening and global uncertainties from the simmering U.S.-China trade war.

Thursday's rate cut was also enabled by the U.S. Federal Reserve's decision to lower its benchmark interest rate by 0.25 percentage point -- its first cut in 10 and a half years.

Still, Bank Indonesia's decision was unexpected, with Warjiyo citing renewed concerns from trade tensions. U.S. President Donald Trump's announcement of new tariffs on China has weighed on the rupiah.

Warjiyo took note of the rupiah's depreciation in August but said the central bank "sees that the rupiah will continue to move in a stable manner," against a backdrop of "prospects of sustained capital inflows that are in line with improving prospects for the domestic economy."

After the rate cut announcement, the rupiah rose slightly. 

Josua Pardede, vice president and economist at Indonesian private lender Bank Permata, said the central bank's decision did come as a surprise, but that it has been enabled by stable inflation and a predicted fall in Indonesia's current account deficit this year.

He noted, though, that Warjiyo stopped short on Thursday of repeating his remarks last month, in which he hinted at further cuts through the end of the year. "So this means room for easing is becoming more limited," Pardede said.

However, HSBC Global Research, one of the few economy watchers to predict Thursday's cut, said it expects another 25 basis point easing in the last quarter of the year.

"Bank Indonesia's focus tends to oscillate between an emphasis on growth and financial stability. In recent months however, we detect that the central bank has started to focus more squarely on growth risks," HSBC said in a note on Thursday. "Tangible progress on reforms to liberalize and promote [foreign direct investment] could obviate some of BI's concerns about the balance of payments, thereby allowing it to deliver more rate cuts."

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