B

ank Indonesia (BI) has finally slashed its benchmark interest rate after almost a year as economic pressures subside, a move expected to help spur the country'€™s slowing economy.

BI said on Thursday that it had reduced its key rate by 25 basis points (bps) to 7.25 percent. At the same time, it lowered both the deposit and lending facilities by 25 bps as well, to 5.25 percent and 7.75 percent, respectively.

This is the first rate cut since February 2015 when the central bank lowered its benchmark interest rate to 7.5 percent from 7.75 percent. The central bank'€™s decision to cut the interest rate came just hours after Jakarta was hit by a series of explosions that killed several people, the worst such attack in the Indonesian capital since at least 2009.

BI said in a statement that the decision was in line with its conviction that recent macroeconomic stability had opened up room for a loosening of monetary policy.

The central bank previously lowered its reserve requirement ratio (GWM) in November in an attempt to inject liquidity into the banking system.

Thursday'€™s decision took into account diminishing uncertainty in the global financial market after the recent hike of US Federal Reserve fund rate, as well, it said in the statement.

The diminishing uncertainty in the global market has brought foreign funds back into the government'€™s securities market. The government successfully generated US$3.5 billion from the issuance of global bonds amid signs of an improvement of investor confidence in the Indonesian economy.

Data from BI show that even though the rupiah was almost always under pressure throughout 2015, the currency strengthened slightly from a month before by 0.4 percent to 13,785 per US dollar in December.

BI also said that full year inflation in 2015 had been within the target and the financial system'€™s stability remained well maintained and that further laid the foundation for the rate cuts.

Meanwhile, Daniel Martin, senior Asia economist at research company Capital Economics, said that the stock market and the rupiah had both been relatively stable on Thursday amid a series of explosions in the capital.

Share prices and the rupiah plunged sharply in the morning following the attack, but both managed to rebound in the afternoon. The local exchange'€™s Jakarta Composite Index only dropped 0.5 percent to end the day at 4,513.18 after falling nearly 2 percent in morning trading, while the rupiah slightly weakened to 13,907 per US dollar at the end of the trading after falling to Rp 13,980 in the morning.

Daniel said that the rate cuts should provide a long-overdue boost to the struggling economy, but added that he believed BI would take a cautious approach from here.

'€œLooking ahead, inflation is likely to remain low for the rest of this year, which will leave the rupiah as the main barrier to further rate cuts,'€ he said. '€œWe are expecting just one, possibly two, more 25bp [basis point] cuts this year.'€

UOB economist Ho Woei Chen and OCBC Bank economist Wellian Wiranto also expressed belief that the attacks did not damage the rupiah.

Instead, a more aggressive monetary easing could put upside risk into the US dollar-Indonesian rupiah forecast.

'€œIn the end, BI did what it did, which is to cut rates by 25 bps across all three key rates, partly because it knows that such terrorist attacks would have little long-term repercussions for the Indonesian economy,'€ Wellian said in an email.
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