Bank Indonesia Steps Up Action as Political Pressure Mounts

Indonesia's central bank reduced its main interest rates and reserve ratio for lenders, taking more determined action to boost the economy in the face of political pressure.

Governor Agus Martowardojo and his board lowered the benchmark reference rate by 25 basis points to 7 percent, Bank Indonesia said Thursday. That's in line with the forecasts of 17 of the 28 economists surveyed by Bloomberg, while the rest predicted no change. The monetary authority also lowered the reserve-requirement ratio for lenders by 100 basis points to 6.5 percent.

Falling crude prices are helping to curb inflation in Indonesia, giving policy makers room to focus on supporting an economy that expanded last year at the slowest pace since the end of the financial crisis in 2009. President Joko Widodo said in an interview last week that he wants to see interest rates fall further to spur growth, a view echoed on Thursday by the economic affairs minister.

"Marginally, it's more aggressive than expected," Wellian Wiranto, an economist in Singapore at Oversea-Chinese Banking Corp., said by phone, adding a smaller reduction in the reserve ratio had been a possibility. "This might not be the last cut."

Bank Indonesia also lowered the rate it pays lenders on overnight deposits, known as the Fasbi, to 5 percent from 5.25 percent, while the lending facility rate was reduced by the same magnitude to 7.5 percent.

Stocks rose and the currency fell after the announcement. The Jakarta Composite Index rose 0.3 percent after nearly erasing an earlier increase on Thursday, while the rupiah pared gains after the decision to close 0.1 percent stronger at 13,503 a dollar, according to prices from local banks. Two-year government bonds extended losses, pushing the yield up six basis points to 7.65 percent.

"The decision to lower the reserve-requirement ratio was a surprise," Miles Remington, head of equities at BNP Paribas Securities Indonesia, said by e-mail. "The move should further boost confidence among investors on Indonesia."

Asian economies from Japan to Singapore are seeing exports collapse, putting pressure on policy makers to act as the growth outlook deteriorates. Expectations are mountingthat central banks in China, India, Thailand and elsewhere may lower interest rates this year.

Inflation in Indonesia eased to 4.1 percent in January from 6.96 percent recorded a year earlier. The central bank said Thursday it expects inflation at the "mid-point" of the 3 percent to 5 percent range in 2016, and projected the year's economic growth at 5.2 percent to 5.6 percent. Exports had plunged 21 percent in January from a year ago, more than the median estimate for a 15.2 percent decline in a Bloomberg survey.

Widodo said in an interview on Feb. 11 that while the central bank was independent, he would like interest rates "to fall, fall, fall, fall, and keep falling so the real sector can compete with other countries."

Darmin Nasution, coordinating minister for economic affairs, told reporters in Jakarta on Thursday that the government, the Financial Services Authority and Bank Indonesia will form a team to coordinate efforts to lower rates and the cost of funds at banks.

"The cuts are aimed at restoring some strength in the economy," Daniel Martin, a senior Asia economist at Capital Economics Ltd. in Singapore, said in a note to clients. "It could be tempting to say that today's decision is a sign that BI has now moved away from the cautious approach that it has taken over the last year. But we think it is too early for that."

Source: Bank Indonesia Steps Up Action as Political Pressure Mounts