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Economy

Indonesia cuts interest rate to 5%, as inflation stays low

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Indonesia's central bank cuts interest rates on Thursday as inflation remains relatively low. A vegetable seller serves a customer at a traditional market in south Jakarta.   © Reuters

JAKARTA -- Indonesia's central bank slashed interest rates by another 25 basis points to 5.0% on Thursday, a day after the U.S. Federal Reserve said it would leave its reference rate unchanged.

Bank Indonesia announced the cut for its seven-day reverse repurchase rate, introduced in August as a new policy rate, as credit growth has been slower than expected. It is the bank's fifth cut this year.

"Amid the global economic situation that remains weak, this monetary policy easing is expected to strengthen efforts to push domestic demand, and therefore to further push for economic growth," said Bank Indonesia Gov. Agus Martowardojo.

Bank Indonesia also cut the deposit facility rate and the lending facility rate by 25 basis points each, to 4.25% and 5.75%, respectively. Martowardojo said monetary easing may continue through early 2017.

Bank loans grew only 7.7% year-on-year in July, lower than 8.9% the month before and lower than the central bank's target of 10-12% in 2016.

Martowardojo said credit growth has been dragged down by a "sharp decline" in foreign exchange loans, citing the slower-than-expected economic recovery in the U.S., Europe, China and Japan.

Meanwhile, inflation came in at 2.79% year-on-year in August, the lowest level since December 2009 and below the bank's target of 3-5%, which allows room for further monetary easing.

The four cuts earlier in the year had failed to bolster credit growth and Indonesia's economy. In August, the bank adopted a new policy benchmark -- the seven-day reverse repo rate -- in a bid to offer a better guide to market rates than the overnight reference rate, known as Bank Indonesia rate.

Indonesia's stock market rose 0.7% on Thursday following the central bank's announcement.

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