Indonesia Resumes Rate Cuts to Boost Growth as Fed Stays Put

  • Sixteen of 19 economists in survey forecast 25 basis-point cut
  • Inflation eased to slowest in almost seven years in August

Indonesia’s central bank cut interest rates for the fifth time this year as policy makers in Southeast Asia’s largest economy took advantage of a pause by the U.S. Federal Reserve to bolster economic growth.

Governor Agus Martowardojo and his board lowered the seven-day reverse repurchase rate to 5 percent from 5.25 percent on Thursday, as forecast by 16 of 19 economists surveyed by Bloomberg. The rest had predicted the rate would remain unchanged, as the bank had done last month.

Bank Indonesia has loosened monetary policy this year to help spur an economy that’s growing well below the 7 percent target set by President Joko Widodo when he took office two years ago. The Fed’s decision on Wednesday to hold rates is underpinning support for emerging-market assets, while inflation in Indonesia undershot the 3 percent to 5 percent target in August, giving policy makers leeway to add more stimulus.

“Subdued inflation, along with stability in both the current account deficits and exchange rates, has created policy space for rate cuts,” said Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd. “An easing bias will be maintained even after the rate cut.”

Finance Minister Sri Mulyani Indrawati said on Monday that growth is expected to be 5 percent to 5.1 percent in 2016. The central bank forecast inflation -- which reached 2.8 percent in August -- will reach the lower end of the 3 percent to 5 percent target by the end of the year.

Philippines Policy

“Indonesia’s economic growth in the third quarter was still reasonably steady, although it was not as strong as previously expected,” Martowardojo said. “A number of indicators showed that private consumption had been reasonably strong, while non-construction investment had not shown significant improvement.”

Gains in Indonesian financial markets were limited. The Jakarta Composite Index closed up 0.7 percent after being up 0.6 percent shortly before the decision. The rupiah strengthened 0.4 percent to 13,090 a dollar, according to prices from local banks, and the yield on the nation’s 10-year bonds fell seven basis points to 6.89 percent, Inter Dealer Market Association prices show.

Elsewhere in Southeast Asia, Bangko Sentral ng Pilipinas on Thursday held its benchmark rate at 3 percent amid subdued inflation of 1.8 percent in August and economic growth of 7 percent in the second quarter. Deputy Governor Diwa Guinigundo said there is scope to keep monetary policy steady.

“Looking ahead, we think BSP will be in little hurry to either cut or raise interest rates anytime soon,” Gareth Leather, senior Asia economist at Capital Economics Ltd. in London, said in a note after the decision. “The economy remains in good shape, and is in little need of further support.”

— With assistance by Karlis Salna

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