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Economy

Indonesia cuts key rate for fourth straight month

Central bank governor Perry Warjiyo says bank open to further easing.

Bank Indonesia Gov. Perry Warjiyo's board has slashed its benchmark rate by a combined 100 basis points this year, largely reversing the 175 points it hiked rates last year.   © Reuters   © Reuters

JAKARTA -- Indonesia's central bank on Thursday cut its key rate for the fourth time in as many months, in a move that helps President Joko Widodo's push to accelerate growth as he begins his second term.

Bank Indonesia lowered its benchmark seven-day reverse repo rate by 25 basis points to 5%, in line with the predictions of 18 out of 30 economists polled by Reuters.

Southeast Asia's biggest economy slipped into a surprise trade deficit in September, but the Indonesian rupiah has remained stable against the U.S. dollar. With inflation also moderating last month, Bank Indonesia had room to ease further.

BI Gov. Perry Warjiyo said the bank was open to further easing.

"We see that room [to be] accommodative remains open," Warjiyo said at a briefing in Jakarta. "How open it is will be data dependent. The timing also will be data dependent."

Indonesia's growth rate has hovered around 5% in Widodo's first five years in office, falling well short of the initial 7% target that he aimed for. The country is relatively shielded from the global slowdown as it is largely cut off from supply chains, but as a resource exporter, falls in commodity prices from weaker demand damage the economy.

The central bank has now slashed its benchmark rate by a combined 100 basis points this year, largely reversing the 175 points it hiked rates last year to combat a sliding currency. Thursday's move is line with other regional central banks, including India, the Philippines and South Korea, which have all eased in recent months.

David Sumual, chief economist at Bank Central Asia, Indonesia's largest private lender, said Thursday's move matched his expectations, and that BI had a room for another rate cut by the end of this year.

He said, however, that rate cuts alone are not enough, adding that they should be combined with loosening reserve requirement for banks.

"There also should be [support] from the fiscal aspect, from the government's policy side... the economic team in the new cabinet must immediately exert efforts to synergize with monetary policy," Sumual said, citing the need for tax reforms and concerted efforts to boost trade and investment.

Joseph Incalcaterra, chief ASEAN economist at HSBC, said in a report before Thursday's decision, that room was limited for further cuts. He warned that the real policy rate will fall below comparable economies, making Indonesian assets less attractive for foreign investors.

Other analysts are starting to raise the alarm over cutting rates too quickly.

"BI's shift to a seemingly stronger pro-growth stance over only a couple of months runs the risk of inadvertently adding to currency pressures if external risks escalate again," economists at Nomura said in a report.

"Compared with other central banks in the region, significant rate hikes tend to be followed by equally if not more sizable rate cuts over a relatively short period, likely even before the previous moves have fully fed through to the economy" the economists said. "This could contribute to transmission problems as banks have less incentive to adjust lending rates in response to policy rate moves by BI in the knowledge that BI would eventually adjust rates in the opposite direction quickly."

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