The central bank cut its benchmark interest rate by 25 basis points to 5.5 percent on Thursday, in anticipation of slowing economic growth and fallout from global trade tensions. (JG Photo/Dion Bisara)

Bank Indonesia Surprises With 'Pre-Emptive' Rate Cut

AUGUST 22, 2019

Jakarta. Bank Indonesia unexpectedly cut its benchmark interest rate by 25 basis points to 5.5 percent on Thursday, in anticipation of slowing economic growth and fallout from global trade tensions. 

The central bank just cut its benchmark in July – the first time in nine months – leading 17 of 19 economists polled by Reuters to discount the possibility of another rate cut so soon.

But the bank considers the ongoing trade war between the United States and China, and several other geopolitical risks to the Indonesian economy, which is still vulnerable to global commodity prices, as reasons to warrant another rate cut. 

"The policy is consistent with low inflation projected below the midpoint of the target corridor, attractive returns on domestic financial investment assets that support external stability, as well as a pre-emptive measure to safeguard economic growth momentum moving forward against the impact of global economic moderation," Bank Indonesia said.

The bank noted that softening growth in the United States, Europe, Japan, China and India would continue to suppress commodity prices and encourage fiscal stimuli and looser monetary policies around the world. 

"Global financial market uncertainty remains, which has precipitated a shift in global funds to safer assets, such as government bonds in the United States and Japan, as well as gold. Prevailing global economic dynamics must be considered when striving to spur economic growth and maintain foreign capital inflows to support external stability," the central bank said in the statement. 

For now, it sees the Indonesian economy maintaining external resilience despite strong global headwinds. The bank expects the country's current-account deficit to remain between 2.5 percent and 3.0 percent of gross domestic product this year and next year. 

The deficit increased to $8.4 billion, or 3.0 percent of GDP, in the second quarter from $7.0 billion, or 2.6 percent of GDP in the first quarter. The country had $129 billion in foreign exchange reserves at the end of July – enough to cover seven months of imports and service external government debt.

Bank Indonesia projects that the country's economy would grow at less than 5.2 percent this year, "before increasing towards the middle of the 5.1-5.5 percent range in 2020." Southeast Asia's largest economy expanded by 5.05 percent in the second quarter, compared with 5.07 percent in the preceding quarter. 

Inflation would be below 3.5 percent this year and likely fall to between 2 percent and 4 percent next year, the central bank said. The last inflation reading was 3.32 percent in July, up slightly from 3.28 percent a month earlier.

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