Bank of Indonesia Cuts Rates to 7.25%

The Impact of Jakarta Terror on Markets
  • Decision forecast by a narrow majority of economists
  • Central bank had to weigh concern over rupiah volatility

Indonesia’s central bank cut its main interest rate for the first time in 11 months, prioritizing a boost to flagging economic growth over concern looser policy could trigger more currency weakness. Bonds rose and stocks pared losses incurred earlier due to deadly attacks in Jakarta.

Governor Agus Martowardojo and his board lowered the reference rate by 25 basis points to 7.25 percent, Bank Indonesia said Thursday. Thirteen of 23 economists surveyed by Bloomberg forecast the decision, while the remainder predicted policy makers would hold. The monetary authority also cut the rate it pays lenders on overnight deposits, known as the Fasbi, by 25 basis points to 5.25 percent.

The rate move came on a day when seven people were killed in explosions and gunfire in the biggest attack in the capital since at least 2009, hurting sentiment and adding to financial market turmoil. The impact on money markets from the Jakarta attack should be temporary, the central bank said.

Government bonds rose, pushing the two-year yield down nine basis points to a one-month low of 8.29 percent after the decision. The Jakarta Composite Index of shares closed 0.5 percent lower after dropping as much as 1.8 percent earlier.

The central bank has faced political pressure to ease policy and revive an economy growing at the slowest pace since 2009, while grappling with a rupiah selloff. Contained inflation provides scope for policy makers to cut, though they also have to consider fallout from last week’s sharp drops in China’s currency and stocks.

Another Cut?

“Assuming stability of the rupiah can be maintained, BI may follow-up with another rate cut this quarter,” said Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore. “Certainly, this is not a done deal, given how BI will still focus on maintaining rupiah stability in the market, amidst the lingering uncertainties in global markets."

The "measured rate cut" is aimed at supporting previous moves such as macroprudential policy easing and a lower reserve-requirement ratio, the central bank said in a statement. Bank Indonesia’s policy is to focus on stability and the growth momentum, it said, adding it will maintain an accommodative policy by considering financial-system stability and promoting market deepening.

Further policy easing may be done after a thorough assessment of the global and domestic situation, the central bank said.

“A loosening of monetary policy in Indonesia in the face of a dramatic China-driven deterioration in sentiment and the start of the Fed’s rate-hiking cycle is a very significant development,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “It shows the extent to which concerns about the slowing economy are just as important as financial stability considerations.”

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