In line with expectation, the central bank of Indonesia (Bank Indonesia) cut its benchmark interest rate (BI rate) by 25 basis points to 6.75 percent on Thursday (17/03) at its two-day policy meeting. It is the third straight month of monetary easing in Southeast Asia's largest economy. In the preceding two months the lender of last resort had also cut borrowing costs by 0.25 percent, each month. Furthermore, the deposit and lending facility rates were also cut by 25 basis points to 4.75 percent and 7.25 percent, respectively (effective per 18 March 2016).
Today's BI rate cut had been expected by most analysts because Indonesia's rupiah has been on a strengthening trend since January 2016, inflation more-or-less under control, while the trade balance has been in surplus over the past year (although the decline of both exports and imports remains a concern) and the current account deficit has been narrowing in recent quarters.
In a statement released on its website Bank Indonesia also mentioned that another rate cut was justified as global uncertainties in global financial markets have eased. The central bank also stated that it does not expect to see a US interest rate hike in the first half of 2016. Given the sluggish economic recovery of several advanced markets and weaker-than-expected economic growth in emerging markets the Federal Reserve kept its Fed Fund Rate at 0.25 - 0.50 percent in March. Bank Indonesia also expects the oil price to remain low due to ample oil supplies in combination with bleak demand.
Previously, high positioned government officials (including President Joko Widodo) had repeatedly requested the central bank to lower the country's borrowing costs in order to make room for accelerated economic growth. A local newspaper - Jakarta Globe - mentioned in an article released today (17/03) that government pressure was partly behind the central bank's decision to lower its interest rates (although Bank Indonesia is a fully independent institution).
Regarding Indonesia's economic growth in the first quarter of 2016, Bank Indonesia expects a stronger performance than in the preceding quarter (+5.04 percent y/y) on the back of government capital spending and household consumption. However, private investment is expected to remain sluggish, so is Indonesia's export performance (due to persistently low commodity prices and global economic moderation). In full-year 2016 Bank Indonesia estimates the economy will grow in the range of 5.2 - 5.6 percent (y/y).
Bank Indonesia also announced that outstanding loans in Indonesia grew 9.6 percent (y/y) in January 2016, down from a 10.5 percentage point (y/y) growth pace in the preceding month. The central bank targets the country's annual loan growth to grow in the range of 12 - 14 percent in 2016.
Earlier, Bank Indonesia lowered banks' reserve requirement ratio on two occasions. This move is estimated to provide banks with an additional IDR 52 trillion (approx. USD $4 billion).