Bank Indonesia hopes the lower benchmark interest rate would support the country's economic growth. (Antara Photo/Aprillio Akbar)

Bank Indonesia Cuts Benchmark Rate on Fed Easing Expectations

JULY 18, 2019

Jakarta. Bank Indonesia cut its benchmark interest rate by 25 basis points to 5.75 percent on Thursday in anticipation of expected policy easing by the United States and other developed countries. 

This was the central bank's first cut in nine months as it strives to balance an interest level that can support domestic economic growth with uncertainty in the global economy. 

"Continued tensions in trade relations continue to pressure the volume of world trade and slow down global economic growth," the bank said in a statement. 

"A number of central banks in developed and developing countries are responding to these unfavorable economic dynamics with looser monetary policies, including the US central bank, which is predicted to reduce monetary policy interest rates," it said. 

Bank Indonesia said domestic inflationary pressures have subsided, especially after the Idul Fitri festive season. Inflation peaked at 3.3 percent in May and slowed to 3.2 percent in June, with the central bank now not expecting it to exceed 3.5 percent by December. 

On the external side, Bank Indonesia found confidence in large capital inflows to buffer Indonesia's current-account deficit. 

"Foreign capital inflows in the form of foreign direct investment and portfolio investment are predicted to record a substantial surplus, driven by a favorable national economic outlook and high investment attractiveness of domestic financial assets," the bank said. 

In June alone, capital inflows in Indonesian bonds and equities amounted to $9.7 billion, central bank data showed. 

"Following the string of good news and expectation of a US Federal Reserve rate cut, foreign funds continue to pour into rupiah assets," Bank Danamon economist Dian Ayu Yustika said in a recent research note. 

Going forward, Bank Indonesia hopes the lower benchmark interest rate would support the country's economic growth. The central bank said stable household consumption and a pickup in investment may help assuage lower exports. 

"Overall, Bank Indonesia predicts Indonesia's 2019 economic growth to be below the midpoint of the 5.0-5.4 percent range," the central bank said. 

Southeast Asia's largest economy expanded by 5.07 percent in the first quarter, compared with 5.18 percent in the preceding quarter. The government has set an economic growth target of 5.2 percent for this year.

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