Bank Indonesia Cuts Key Interest to Pep Reluctant Economic Mood

Photo by President Office

JAKARTA (TheInsiderStories) – Indonesia’s central bank (BI) unexpectedly cuts its interest rate on Friday for a second consecutive month, in an attempt to boost sluggish lending and consumption, both depressing economic growth.

BI cut its benchmark seven-day reverse repurchase rate by 25 basis points last month, to 4.25 percent, following its first cut since October 2016. Deposit and lending facility rates were also cut, by 25 basis points each to 3.50 percent and 5.00 percent, respectively.

Dody Budi Waluyo, BI’s Executive Director of Economics and Monetary Policy explained how the central bank considers the current benchmark interest rate sufficiently in line with inflation and macroeconomic forecasts for the future.

“Bank Indonesia continues to coordinate with the Government to strengthen the policy mix in order to maintain macroeconomic stability and strengthen the momentum of economic recovery,” Dody announced on Friday (23/9).

Meanwhile, the outlook for the global economy is expected to improve, particularly in developing countries. US economic growth is expected to be higher, in line with improved domestic demand. Similarly, economic growth in Europe is improving, as consumption rises and financial sector uncertainty declines.

Some sectors or Indonesia’s economy are expected to improve in third quarter 2017. Improvement in domestic demand, especially in household consumption, is seen in better retail sales and merchandising of durable goods.

With these developments, economic growth in 2017 is expected to be within the range of 5.0 to 5.4 percent and will increase to 5.1 to 5.5 percent by 2018.

The Rupiah is stable and tends to appreciate. During August 2017, the Rupiah average appreciated by 0.02 percent to Rp13,343 per US dollar, influenced by a weakening dollar and foreign capital inflows that resulted in net supply for the forex market.

A weaker US dollar derives from dovish statements from the Fed and the ECB, as well as concerns about US economic growth. Meanwhile, inflows of foreign funds are supported by a positive yield outlook.

On the other hand, the volatility of the Rupiah exchange rate is maintained and stays lower than that of peers.

Writing by Elisa Valenta, Email: elisa.valenta@theinsiderstories.com