Indonesia Slashes Benchmark Rate, First In 11 Months, to 7.25%, Rupiah Appreciates

January 15
8:46 AM 2016

Bank Indonesia (BI), the central bank of Indonesia on Thursday has announced slashing its benchmark policy rate by 25 basis points to 7.25%. The central bank has slashed its key interest rate for the first time in 11 months in a bid to boost the slowing growth momentum.

The overnight deposit facility rate and lending facility rate are also cut by the same amount to 5.25% and 7.75% respectively. The benchmark rate has been decreased earlier in February also by 25 basis points to 7.50%, reports Reuters.

The decision has been announced hours after explosions and gunfire in central Jakarta less than two kilometers from the Bank Indonesia (BI) through its first policy meeting of 2016. Amid reported turmoil, the Rupiah has been weakened and later strengthened slightly after the rate cut announcement.

The reduction of the BI Rate is expected to support previous macro prudential policy easing and the lowering of primary reserves in Rupiah. Further easing may take place after rigorous assessments of the domestic and global economy, while maintaining macroeconomic and financial system stability, according to a report published in The Malaysian Insider.

Economic growth in Q4/2015 hasn't improved significantly, despite fiscal stimuli and macro prudential policy relaxation. Dwindling global demand and low commodity prices have contributed to undermine exports.

Capital and financial account surplus have helped to improve country's balance of payments during the fourth quarter. The current account deficit in 2015 has been expected to improve to about 2% of GDP from 3.1 percent.

Further rate slashing is strongly predicted since the country's economy is growing at the weakest pace. However, BI is expected to adopt a fairly cautious policy, reports Forex TradingCharts quoting Gareth Leather of Capital Economics.

BI has been witnessing wide space for loosening monetary policy since its policy meeting in October. But it has been refrained from cutting benchmark rate Federal Reserve's first rate hike within a decade. BI has been reported to remain concerned since lower domestic rates may spark capital outflows and weaken the fragile Rupiah.

Rupiah has performed as the second worst currency and fall by 10% against dollar touching a 17- year low during first three quarters of 2015. But in fourth quarter, the currency has turned to be a best performing one with a 6.2% jump. In fact, Rupiah remains a bit safe compared to other countries ahead of the early 2016 emerging market rout.

The Central Bank of India, has announced slashing benchmark interest rate by 25 basis points to 7.25%, for the first time in 11 months. The central bank has been witnessing huge opportunity for rate cuts since October. Due to Federal Reserve's first rate increase within a decade, it has restrained from rate cutting fearing capital outflows and weakening of Rupiah. However, Rupiah has appreciated a little followed by the announced rate cutting.

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