Bank Indonesia lowered its 7 days reverse repo rate (BI-7DRR) by 25 bps to 5.75 percent during its July meeting - Photo: BI' Office.

JAKARTA (TheInsiderStories) – Bank Indonesia lowered its 7 days reverse repo rate (BI-7DRR) by 25 bps to 5.75 percent during its July meeting after maintained at 6 percent in June. This is the first interest rate cut since September 2017, in an attempt to support growth amid low inflation expectations.

The overnight deposit and lending facilities were also trimmed by the same amount to 5.00 percent and 6.50 percent, respectively. BI’ Governor Perry Warjiyo said the policy was pursued in line with the continued low forecast of inflation and the need to push the momentum of economic growth, amid conditions of uncertainty in the declining global financial market and controlled external stability.

“The monetary operations strategy is still directed at ensuring the availability of liquidity in the money market and strengthening the transmission of accommodative monetary policy,” he said on Thursday (07/18) after the meeting at his office.

Macroprudential policies remain accommodative to encourage bank lending and expand financing for the economy. Payment system policies and financial market deepening are also being strengthened to support economic growth, he adds.

Going forward, the central bank sees open space for accommodative monetary policy in line with the low inflation forecast and the need to push for further economic growth momentum, the policymakers said.

Continued tensions in trade relations continue to pressure the volume of world trade and slow down global economic growth, the board said. The United States (US) economy is predicted to slow down due to declining exports as a result of tensions in trade relations, limited fiscal stimulus, and not yet strong economic players’ beliefs.

Economic growth in the European region also slowed due to the decline in export performance and structural problems related to the aging population, which then affects domestic demand. Declining export performance and slowing domestic demand also occurred in China and India.

The weakening global economy, in turn, has put pressure on commodity prices, including oil prices. A number of central banks in developed and developing countries are responding to this unfavorable economic dynamics by taking looser monetary policies, including the US central bank which is predicted to reduce monetary policy interest rates.

Indonesia’s economic growth in the second quarter of 2019 is predicted to be relatively the same as economic growth in the previous quarter. Private consumption remains well supported by consumer confidence that is maintained. Building investment also continues to grow steadily.

Meanwhile, Indonesia’s export growth is predicted to be negatively affected due to limited world demand and falling commodity prices due to continued trade relations tensions, although steel exports rose in June 2019. The impact of trade relations tensions on slowing exports also occurred in a number of countries.

Furthermore, the contraction in exports led to a decline in imports and limited growth in non-construction investment. Going forward, Warijiyo said, efforts to boost domestic demand, including investment, need to be increased to mitigate the negative impact of the world economic slowdown. Overall, the central bank predicts the country’s 2019 economic growth to be below the midpoint of the range of 5.0-5.4 percent.

June 2019 inflation is maintained at a low and stable level. The June 2019 Consumer Price Index inflation was recorded at 0.55 percent (mtm) or 3.28 percent (YoY), a slight decrease compared to the previous month’s inflation of 0.68 percent (mtm) or 3.32 percent (YoY).

Core inflation remains under control, supported by the consistency of the central bank’s policies in directing inflation expectations, including in maintaining exchange rate movements in accordance with its fundamentals.

Administered prices inflation recorded deflation, in line with the positive impact of air transport tariff adjustments. Inflation volatile maintained in line with the end of seasonal patterns related to Ramadan and Eid.

The central bank continues to strengthen policy coordination with the government, both at the central and regional levels, to ensure inflation remains low and stable, including in anticipation of an earlier and longer dry season. 2019 inflation is predicted to be below the midpoint of the target range of 3.5 ± 1 percent.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com

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