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BI cuts rate to 6.75% in wake of dovish FOMC
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A pedestrian passes the Bank Indonesia building in Central Jakarta. The central bank has decided to cut its key rate by a further 25 basis points to 6.75 percent. (thejakartapost.com/Wienda Parwitasari)
B
ank Indonesia (BI) cut its benchmark interest rate by 25 basis point (bps) to 6.75 percent on Thursday, responding to the US central bank's dovish statement after the Federal Open Market Committee (FOMC) meeting.
The cut is the third time in a row BI has slashed the rate by 25 bps, after having kept it at 7.5 percent for 11 months in 2015. The deposit and lending facilities rates were meanwhile cut to 4.75 percent and 7.25 percent, respectively.
BI spokesperson Tirta Segara said the decision was in line with the broader program to ease monetary policy to maintain macro-economic stability amid benign inflation and a more stable global economy.
"The BI rate policy is expected to strengthen the domestic economy, boost economic growth and maintain monetary stability," Tirta said at a press conference after a bank board of governors meeting in Jakarta on Thursday.
BI's short-term focus, he continued, is to emphasize on strengthening the central bank's operational framework and coordination with the government to ensure the success of structural reform. "Looking ahead, BI will be more cautious on interest rate policy, taking into account the assessment and development of the global economy," Tirta added.
The US Federal Reserve’s statement took a more dovish tone, with a downgrade of economic growth and inflation expectations, suggesting the Fed would only raise interest rates twice this year instead of three or four times, as previously expected by the market.
This left the US dollar to depreciate against its major trading partners. It dropped 192 points or 1.45 percent against the rupiah on Thursday, sending the rupiah to 13,075 per dollar.
The rate cut was in line with Morgan Stanley’s estimation in its latest report entitled ‘Combination of Rate Cut & Reserve Requirement Ratio Cut to Manage Liquidity & Support Growth’. The investment bank expects another 25-bps cut in the second quarter of 2016.
"We think risks are skewed toward more easing both in terms of policy rate and reserve requirement ratio if inflation were to surprise to the downside and the current account deficit stays contained," the report wrote. (ags)
