Indonesia’s central bank tries again to spur growth by cutting key rate

JAKARTA: Indonesia´s central bank on Thursday surprisingly cut its benchmark interest rate for a sixth time this year, indicating concern that its efforts to jack up sluggish lending and economic growth are not working as hoped.

Bank Indonesia (BI) cut the 7-day reverse repurchase rate by 25 basis points to 4.75 percent. "In the midst of a weak global economy, we believe this monetary easing will strengthen efforts to push domestic demand, including for credits, so that it could support the momentum for economic growth," BI said.

Thirteen of 17 economists in a Reuters poll had expected the benchmark to be kept at 5.00 percent on Thursday. In total, the central bank has cut its benchmark by 150 basis points this year.

The cuts started early this year, after economic growth disappointed by staying below 5 percent, compared with President Joko Widodo´s target for 7 percent a year. In August, BI switched its benchmark from the 12-month reference rate to the 7-day reverse repurchase rate to try to more directly affect market rates.

The economy gained some momentum in the second quarter, with good crops and higher government spending helping push annual growth to 5.2 percent. But commercial banks were slow to lower their loan rates.

In August, lending expanded just 6.83 percent from a year earlier, the weakest pace since November 2009, and BI expected it to have slowed further in September.

The central bank has said state spending cuts, sluggish bank lending and weak global trade probably weakened third quarter growth to around 5 percent.

BI´s outlook for 2016 is between 4.9-5.3 percent.

Indonesia is due to announce third quarter growth early next month.

While lending has slowed, inflation has remained in a comfortable level while the Federal Reserve has held off on raising U.S. interest rates.

So economists say there has been a window for BI to keep lowering rates in hope of spurring stronger growth.

A BI official said on Thursday there may be more easing, but the timing will depend on data.

Rangga Cipta, economist with Samuel Sekuritas in Jakarta, said Thursday´s cut is unlikely to be the last as "fundamentally room for a further cut is available", but increasing global volatility in the fourth quarter may affect BI´s decision.

In September, Indonesia´s annual inflation rate was near the lower end of BI´s target band, at 3.07 percent.

The rupiah has been stable, trading near 13,000 a dollar since July.

The third quarter´s current account deficit is expected to stay at a comfortable level.

Ng Weiwen, economist at ANZ said real interest rates in Indonesia "remain elevated despite the rate cuts this year".