Bank Indonesia (BI) is undergoing an aggressive easing cycle in support of President Joko “Jokowi” Widodo’s focus on jacking up domestic spending to boost the country’s record-slow economic growth.

The central bank delivered a surprise cut of 25 basis points (bps) to its policy rate on Thursday, taking it to 5.5 percent after trimming it a quarter of a point last month. Only 13 of the 34 economists surveyed by Bloomberg projected the move.

The step follows those of global central banks that almost simultaneously cut policy rates to help anchor their slowing economies.

“The policy is consistent with low inflation projected below the midpoint of the target corridor, attractive returns on domestic financial investment assets that support external stability, as well as a preemptive measure to safeguard the momentum of economic growth moving forward against the impact of global economic moderation,” BI Governor Perry Warjiyo told a press conference.

The lower benchmark, the 7-day reverse repo rate, is expected to bring down bank lending rates and eventually boost spending and investment, the main drivers of the country’s gross domestic product (GDP).

Indonesia’s economy slowed to a 2-year low of 5.05 percent, a far cry from its 5.2 percent goal this year, in the second quarter as cooling global growth hampered exports and investment.

“BI will continue its accommodative policy mix,” stressed Perry, adding that such policies could be related to the financial system’s liquidity as well as in the form of a lower benchmark rate.

The policy was implemented amid a benign inflation rate. Indonesia’s consumer price index stood at 0.31 percent month-on-month (mom) in July, lower than 0.55 percent recorded in June. Annually, the country’s inflation penciled at 3.32 percent, still within the central bank’s target of between 2.5 and 4.5 percent.

Economists are of the view that such a move is in line with the government’s efforts to support growth, saying that the central bank reaffirmed its commitment to being ahead of the curve.

“Amid a slowing global economy, Indonesia’s growth does rely on its domestic market and it needs a looser monetary policy to strengthen the market,” said Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah.

The International Monetary Fund in July lowered its global economic growth projection to 3.2 percent this year amid escalating trade tensions between China and the United States, uncertainties related to the United Kingdom’s decision to leave the European Union and the Federal Reserve’s monetary policy. Such risks are expected to lower global demand and disrupt international trade.

At home, Jokowi proposed that the 2020 state budget focus on infrastructure and human capital development, which are expected to strengthen productivity and in turn jack up domestic spending in Southeast Asia’s largest economy. The government’s total expenditure in the draft is projected to reach Rp 2.52 quadrillion (US$177.31 billion), or 7.9 percent higher compared to this year.

“BI signals that all parties going forward have to stay vigilant of slowing global economic growth, so BI feels the need to maintain the domestic economy’s resilience through a dovish policy rate,” state-owned lender Bank Negara Indonesia (BNI) head economist Ryan Kiryanto said.

The banking industry will respond to the lower benchmark by trimming interest rates, which is expected to encourage loan demand from customers, according to Bank Permata economist Josua Pardede.

“In addition to spending, the lower benchmark is projected to push down the cost of borrowing so that it will push investment into real sectors,” he said.

Investments, the second-highest contributor to the country’s GDP after household spending, expanded sluggishly at 5.01 percent in the second quarter, lower than the 5.85 percent growth recorded over the same period in 2018, Statistics Indonesia (BPS) data shows.

However, the lower BI policy rate will take at least six months before it translates into lower borrowing costs, said University of Indonesia macroeconomic and financial researcher Febrio Kacaribu.

“BI’s move to cut the rate should be seen as a relaxation for banks [in channeling their loans],” he said, projecting the central bank would slash its benchmark one more time before the year-end.

In July, Bahana Sekuritas and Morgan Stanley projected four rate cuts until December, slashing the benchmark by one percentage point to 5 percent.

The cuts were moderate compared to the 175-bps rate hikes undertaken by BI last year, Bahana economist Satria Sambijantoro wrote in a research note.

— Prima Wirayani contributed to this story

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