Indonesia central bank slashed its key interest rate for the first time in 11 months on Thursday, in a bit to boost the slowing growth momentum.
The Board of Governors of Bank Indonesia, led by Governor Agus Martowardojo, cut the key policy rate by a quarter point to 7.25 percent. The move was in line with economists’ expectations.
The bank also cut the lending facility rate and deposit facility rate, known as FASBI, by the same amount to 5.25 percent and 7.75 percent, respectively.
The previous change in the main policy rate, known as the BI rate, was in February last year, when it was reduced by 25 basis points.
Further policy easing will be made after a thorough assessment of the domestic and global economic situation and to maintain stability in the financial system, the bank said in a statement.
“Indonesia’s economic growth in the fourth quarter 2015 has not shown significant improvement, in spite of the fiscal stimulus and relaxation of macroprudential policy,” the bank said.
The central bank went ahead with the scheduled policy session as the police fought gunmen in central Jakarta following explosions and gunfire in the area. Reports suggest several people were killed in the attack.
The Indonesian rupee and stock market dropped on the news of the terrorist attack, reports said.
Capital Economics’ Gareth Leather said further loosening looks likely with the economy growing at its weakest pace since the global financial crisis and inflation set to remain low. However, the economist expects the the bank to adopt a fairly cautious approach.
“Over the past year the central bank has been paying at least as much attention to the rupiah as it has to the strength of the economy,” Leather said.
“Cutting rates too aggressively could cause the current account deficit to widen again, which would increase the rupiah’s vulnerability to an external shock.”
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