Indonesia's central bank cut its key interest rate for the first time in nearly two years and signaled more easing in future, joining its peers who have reduced rates ahead of a possible rate cut from the US Federal Reserve. The Board of Governors, led by Governor Perry Warjiyo, decided to reduce the 7-day reverse repo rate by 25 basis points to 5.75 percent, Bank Indonesia said in a statement on Thursday. The decision was in line with economists' expectations. The latest reduction was the first since September 2017. Both the deposit and lending rates were reduced by a quarter-point each to 5 percent and 6.5 percent, respectively. "The policy is consistent with low inflation expectations and the need to build economic growth momentum amidst a backdrop of easing global financial market uncertainty and controlled external stability," the bank said. "Going forward, Bank Indonesia sees open space for accommodative monetary policy in line with the low inflation forecast and the need to push for further economic growth momentum."
Bank Indonesia also noted that the relaxation in policy stance as signaled by central banks in advanced economies have reduced the global financial market uncertainty and driven foreign capital inflows to developing economies. The bank had hiked interest rates by a cumulative 175 basis points in six instances between May and November last year to support the currency Rupiah that had weakened sharply amid rising global uncertainties such as trade conflicts.
Thereafter, the bank left them unchanged for seven policy sessions in a row. In June, the bank cut the reserve requirement for banks by 50 basis points to provide sufficient liquidity in the banking system to support lending to the real economy.
Earlier on Thursday, South Korea's central bank cut its key interest rate for the first time since 2016 citing ongoing weakness in exports amid trade tensions. Australia, New Zealand, India, Malaysia and Russia, among others, have cut interest rates this year and some have signaled more easing in future.
Global trade tensions have hurt Indonesia's exports and this has disrupted imports. Consequently, investment in sectors other than construction remains subdued. Bank Indonesia forecast the country's growth to come in below the midpoint of the 5-5.4 percent range this year. The central bank expects a narrower current account deficit in 2019 versus 2018, in the range of 2.5-3 percent of GDP. Inflation for this year was seen below the midpoint of the target corridor of 3.5 percent plus or minus 1 percent. "While further rate cuts now appear highly likely, the central bank will probably proceed cautiously," Capital Economics economist Franziska Palmas said. The uncertain outlook for the currency Rupiah means that this is unlikely to be the beginning of a prolonged easing cycle, the economist noted. The easing cycle is likely to be much shorter than the previous ones, she added. "We are expecting just two further 25bp rate cuts this year," Palmas said.