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Economy

Indonesia cuts rates and growth outlook as COVID stings economy

Government also pinning hopes on vaccine rollout to return to growth

Bank Indonesia cut its key rate for the first time in three months on Thursday, as the country pins hopes on looser monetary policy and its mass vaccine rollout to bolster its flagging economy. (Source photos by Reuters) 

JAKARTA -- Indonesia's central bank lowered its benchmark interest rate for the first time in three months and lowered its growth outlook for this year, as the country continues to struggle with the coronavirus pandemic.

Bank Indonesia on Thursday cut the seven-day reverse repo rate to 3.50% from the previous 3.75%, bringing the rate to the lowest since at least 2016 when the central bank began using the rate as its benchmark.

Twenty-one of 30 analysts polled by Reuters expected the 25 basis points cut, while the remainder had forecast the bank to stand pat.

The central bank lowered its benchmark five times last year by a cumulative 125 basis points, with the last cut coming in November.

"This decision is consistent with the forecast for low inflation and maintained stability of the rupiah exchange rate, as well as a follow-up step to stimulate momentum for national economic recovery," Bank Indonesia Gov. Perry Warjiyo said in an online press conference.

The governor said the cuts have not transmitted to lower rates at the lenders' level.

"The decline in loan interest rates remains limited, at only 83 basis points to 9.70% in 2020," he said, revising down the lending growth rate target for this year to the 5%-7% range from the previous 7%-9% range.

"Bank Indonesia hopes that banks can accelerate the reduction of loan interest rates as a joint effort to boost credit [and] financing for the business world and national economic recovery," he added.

Warjiyo also said that room to cut rates further is now "limited," but stressed the bank has other measures to support the economy, such as its quantitative easing program. Since the start of 2020, the bank has injected 750.38 trillion rupiah ($53.6 billion) worth of liquidity in the banking sector through the program.

In order to boost lending, the central bank said it will remove down payment requirements for vehicle loans for all vehicle types for banks meeting certain criteria, as well as loosening loan to value ratio of mortgages for some property types.

Indonesia's economy shrunk last year for the first time in more than two decades, plunging 2.07% from a year earlier -- a marked downturn from 2019 when it recorded growth of 5.02%. This was the first contraction since 1998, during the peak of the Asian Financial Crisis.

Indonesia continues to be the Southeast Asia nation hardest hit by COVID-19. The government is placing its hopes on a speedy economic recovery through mass vaccinations and is on the verge of completing the first phase of the rollout, under which at least a single shot is given to 1.5 million healthcare workers.

Jakarta also recently increased the budget for its national economic recovery program, which includes funds for the vaccination program, to 688.33 trillion rupiah ($49.5 billion) from an original 372.3 trillion rupiah.

The government hopes that loose monetary conditions, along with more fiscal spending and a swift vaccination rollout can get the economy back to growth for this year.

However, Bank Indonesia lowered its real GDP forecast for this year to 4.3%-5.3%, lower than its previous forecast of 4.8%-5.8%, on the back of what Warjiyo called a slower than expected recovery in the final quarter of 2020.

The government is expecting real GDP to expand between 4.5% and 5.5%.

Meanwhile, the Asean+3 Macroeconomic Research Office projects Indonesia will record 4.9% growth this year, but said "downside risks stem from uncertainties in the pandemic trajectory over the short-run."

"Current elevated infection rates and the retightened, albeit targeted [restrictions on social movement] are likely to weigh on the pace of rebound in the short term... An uncertain pandemic outlook in the short-term may also trigger shifts in investors' sentiment, and expose Indonesia to the possibility of capital flow volatility, in light of a shallow capital market that still relies on foreign investors," it said.

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