Bank Indonesia Pauses Rate Cuts Ahead of New Policy Plan

Key Speakers At The Euromoney Indonesia Investment Forum

Agus Martowardojo.

Photographer: Dimas Ardian/Bloomberg
  • Bank had cut key rate three times this year to support growth
  • Most of 26 economists surveyed by Bloomberg predicted decision

Indonesia’s central bank paused its monetary policy easing ahead of adopting a new benchmark interest rate in August aimed at spurring lending and growth in Southeast Asia’s biggest economy.

Governor Agus Martowardojo and his board kept the reference rate at 6.75 percent, Bank Indonesia said Thursday, in line with the forecasts of 23 of the 26 economists surveyed by Bloomberg. The rest predicted a 25 basis-point cut.

Policy makers set the new benchmark -- the seven-day reverse repo rate that comes into effect in August -- at 5.5 percent. The bank is adopting the new rate to ensure monetary policy adjustments are better transmitted to the broader economy.

“Given that cuts in the reference rate are proving ineffective at getting commercial banks to lower their lending rates, there seems little point in cutting them any further,” Gareth Leather, an economist at Capital Economics Ltd. in London, said in a note to clients. “Instead, BI’s main focus between now and August will be on efforts to get the infrastructure in place to support the new rate regime.”

The rupiah pared its loss after the decision, closing down 0.1 percent at 13,155 a dollar, prices from local banks show. The Jakarta Composite Index extended its gain, finishing up 0.5 percent at 4,903.09, the highest close since July.

Under government pressure to boost flagging economic growth, the bank has shaved 75 basis points off the reference rate this year. Average bank lending rates haven’t fallen by nearly that much, prompting the monetary authority to overhaul its policy.

With commodity prices under pressure, President Joko Widodo is increasing public spending and pledging to introduce reforms to make it easier to do business to help revive an economy that grew last year at its slowest pace since 2009.

The economy probably expanded 5.1 percent to 5.2 percent in the first quarter from a year earlier, led by government spending, Juda Agung, executive director of monetary policy, told reporters in Jakarta after the decision. Growth reached 5 percent in the final three months of 2015.

The central bank said on Thursday the inflation rate will end the year at the midpoint of its 3 percent to 5 percent target range. Consumer prices rose 4.45 percent in March from a year earlier.

The authority left its lending facility rate at 7.25 percent and deposit facility rate at 4.75 percent.

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