The rupiah fell to its lowest level since 1998 on Wednesday against the dollar, declining by 5.8 percent since the beginning of the year. (Antara Photo/M. Agung Rajasa)

Bank Indonesia Surprises Market With 0.25% Rate Cut to Boost Growth

FEBRUARY 17, 2015

This story was updated to add analyst comments, background. It was first published at 06:22 p.m. on Tuesday, Feb. 17, 2015.

Jakarta. Bank Indonesia announced a surprise cut in its benchmark interest rate on Tuesday, in a move meant to boost growth.

The central bank cut its rate by 25 basis points to 7.5 percent, reversing its tightening move in November following a subsidized fuel price hike.

The fuel price has since declined, allowing annual inflation to ease to 6.96 percent last month, from December’s 8.36 percent.

Bank Indonesia also lowered its deposit facility to 5.5 percent from 5.75 percent while keep its overnight lending facility rate at 8 percent.

The Bank Indonesia decision came as a surprise to the market, as a Reuters poll of 20 analysts said the central bank would stand firm on its benchmark rate in order to prevent capital outflows.

Still, some economists said that it was time for the central bank to shift its focus on to growth, after the country grew 5.02 percent last year — its slowest pace of expansion in five years, blamed on weak exports and sluggish investment.

“This is the time for Bank Indonesia to boost the lenders’ credit expansion,” said Anthonius Prasetiantono, an economist at Yogyakarta’s Gadjah Mada University and an independent commissioner at Bank Permata.

“Bank Indonesia has set the lending target for 15 to 17 percent and it can’t be done with the BI rate at 7.75 percent.”

Greater lending should allow companies to invest more and consumers to spend more, thereby driving up the economy, said Gatot Suwondo, the president director of state-controlled Bank Negara Indonesia.

Bank Indonesia maintained its 2015 growth estimate of between 5.4 and 5.8 percent, on the back of greater government spending.

Other economists suggested that Bank Indonesia not lowering the overnight lending facility indicated the central bank’s concern about the current-account deficit remain at less than 3 percent of gross domestic product.

London-based Barclays said Bank Indonesia anticipated infrastructure activity requiring imported materials would kick off in the second half this year, pressuring the current-account deficit amid weak global commodity prices.

The country’s current-account deficit was 2.95 percent of the $900 billion GDP in 2014, narrowing from 3.2 percent the year before.

The central bank has maintained its inflation target for the year at between 3 and 5 percent.

“Bank Indonesia will continue to strengthen coordination with the central and local governments in terms of managing inflation of volatile foods and administered prices in order to ensure attainment of the inflation target,” the central bank said in a statement on Tuesday.

GlobeAsia & Investor Daily