In line with expectations, the central bank of Indonesia (Bank Indonesia) cut its benchmark interest rate (BI rate) by 25 basis points to 7.0 percent at its February Board of Governor's policy meeting. Its overnight deposit facility rate (known as Fasbi) and lending facility rate were also cut by 0.25 percent to 5.00 percent and 7.50 percent, respectively. After the rate cut in January it was the second straight month of lower borrowing costs in Southeast Asia's largest economy. Meanwhile, Bank Indonesia also cut the reserve-requirement ratio for rupiah deposits at commercial banks by 100 basis points to 6.5 percent.
A looser monetary policy is a strategy to provide ammunition to foster accelerating economic growth. Such policy is possible as Indonesia's inflation rate, current account deficit and the rupiah exchange rate are all stable and under control amid the less uncertain global environment. Bank Indonesia stated that it sees cooling global uncertainty as the Federal Reserve is not expected to implement another US interest rate hike before the second half of 2016 (as US macroeconomic indicators - such as consumption, manufacturing and the housing sector - are not too positive).
Bank Indonesia also revised up its forecast for Indonesia's economic growth in 2016 to the range of 5.2 - 5.6 percent (y/y) after seeing GDP growth accelerate in the third and fourth quarters of 2015. However, the central bank emphasized it will require continuous commitment from the Indonesian government to enhance public spending and foster infrastructure development to achieve this forecast.
Bank Indonesia's BI Rate (%):