The Indonesian central bank unexpectedly cut its main interest rate for the first time in three years, joining global counterparts in easing monetary policy to support Southeast Asia’s biggest economy as inflation cools.
Bank Indonesia Governor Agus Martowardojo and the board lowered the reference rate from 7.75 percent to 7.5 percent, the authority said in Jakarta yesterday.
All 20 economists surveyed by Bloomberg News had predicted no change.
The central bank also reduced the rate it pays lenders on overnight deposits, known as the FASBI, by 25 basis points to 5.5 percent.
The nation’s economy shrank last quarter from the previous three months, capping the weakest year since at least the global financial crisis on falling commodity prices and cooling investment.
Policymakers are cutting borrowing costs before potential interest-rate increases in the US this year raise the risk of fund outflows from emerging markets.
“This means they have shifted their focus from the current-account deficit to bigger worries about slowing growth,” Euben Paracuelles, a Singapore-based senior economist at Nomura Holdings Inc, said before the decision. “This could be tricky, when you are trying to boost growth, import demand goes higher. I think the pressure on the rupiah could increase.”
The rupiah has fallen almost 3 percent this year, the worst performer in Asia among 11 widely traded currencies tracked by Bloomberg. The current account deficit is about 3 percent of GDP.
Indonesia’s growth slowed to 5.02 percent last year from a 5.58 percent pace the previous year. Indonesian President Joko Widodo, who took office in October last year, has set a target of 5.7 percent for this year.
The central bank said yesterday it sees the expansion this year to be at 5.4 percent to 5.8 percent.
Bank Indonesia raised the reference rate to 7.75 percent from 7.5 percent at an unscheduled meeting on Nov. 18. The move was aimed at countering inflation triggered by a government decision to trim state-fuel subsidies.
The subsidy cut led to higher prices at the pump, yet the fall in global crude has meant retail prices have since fallen. Consumer price gains slowed last month to 6.96 percent from a year earlier, compared with 8.4 percent in December.
Inflation this year will be at the lower end of the 3 percent to 5 percent target, the central bank said.
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