Indonesia central bank surprises with another cut to key rate

Indonesia’s central bank surprised the market on Thursday by cutting its benchmark interest for a sixth time this year, renewing efforts to spur sluggish lending and growth.

Bank Indonesia (BI) cut the 7-day reverse repurchase rate by 25 basis points to 4.75 per cent. “In the midst of a weak global economy, we believe this monetary easing will strengthen efforts to push domestic demand, including for credits, so that it could support the momentum for economic growth,” BI said.

Thirteen of 17 economists in a Reuters poll had expected the benchmark to be kept at 5.00 per cent on Thursday.

The central bank made six cuts to its benchmark this year by a total of 150 basis points.

In August, it switched its benchmark from the 12-month reference rate to the 7-day reverse repurchase rate to try to more directly affect market rates.

The economy gained some momentum in the second quarter, with good crops higher government spending helping push annual growth to 5.2 per cent.

But the central bank said state spending cuts, sluggish bank lending, and weak global trade probably weakened third quarter growth to around 5 per cent. BI’s outlook for 2016 is between 4.9-5.3 per cent.

So far, BI’s 2016 rate cuts have had limited impact on commercial banks’ lending. In August, it grew just 6.83 per cent from a year earlier, the weakest since November 2009.

Indonesia is due to announce third quarter growth early next month.

In September, Indonesia’s annual inflation rate was near the lower end of BI’s target band, at 3.07 per cent. The rupiah has been stable, trading near 13,000 a dollar since July. The third quarter’s current account deficit is expected to stay at a comfortable level.

Ng Weiwan, economist at ANZ said real interest rates in Indonesia “remain elevated despite the rate cuts this year.”

“Credit growth will be constrained with the overhang from the non-performing loan and the deposit rate caps limiting the interest that banks can pay for deposits,” Mr Ng added.