Indonesia announces surprise rate to offset tepid global growth

Indonesia’s central bank announced a surprise interest rate cut yesterday as it looks to offset tepid global growth, after Southeast Asia’s biggest economy posted its slowest quarterly expansion in two years. Bank Indonesia (BI) trimmed its key lending rate by 25 basis points to 5.5 percent -- the second rate reduction in as many months -- and signalled more cuts could be in store. “This is a pre-emptive measure to boost momentum,” said bank governor Perry Warjiyo.

“Indonesia is fortunate that its economy continues to expand, but we must anticipate the risks of a slowdown in the global economy.” Indonesia has been grappling with weaker prices for key commodities like coal and palm oil, as the world economy falters on the back of the US-China trade war. Some analysts had expected the bank to hold off cutting borrowing costs again over concerns about weakening in the rupiah currency.

“Today’s rate cut came as a surprise,” Franziska Palmas of research house Capital Economics said in a report. “The slowing economy and subdued inflation mean BI would certainly like to cut rates again in the coming months.” But “further loosening is likely to be gradual”, Palmas added. The central bank also lowered its deposit and lending facilities by 25 basis points to 4.75 percent and 6.25 percent respectively.

Economic growth weakened to 5.05 percent in the April-June period as exports and investment slipped -- the slowest quarterly expansion in two years. That has thrown up a challenge for Indonesian President Joko Widodo, who was re-elected this year largely on his bid to energise the economy with a roads-to-airports infrastructure blitz. Last week, Widodo said his second term would focus on cutting red tape and luring foreign investment.

The government also ticked up its economic growth forecast for next year to 5.3 percent, from an earlier 5.2 percent. Indonesia’s economy has been expanding around five percent annually, but that is well short of the seven percent Widodo had pledged in his first term.