Bank Indonesia Cuts Rates for Second Month to Aid Recovery

Bank Indonesia lowered its key interest rate for a second straight month, aiming to help the economy recover from the devastating impact of the coronavirus pandemic.

The central bank cut its seven-day reverse repurchase rate by 25 basis points to 4%, the lowest since the current rate system was adopted in 2016, as predicted by 18 of 30 economists surveyed by Bloomberg. One expected a 50 basis-point cut, while the other 11 expected the bank to hold rates steady.

Indonesia joins central banks worldwide in slashing interest rates to multi-year lows as the pandemic has crippled businesses and rendered millions of people jobless. Bank Indonesia last week pledged to finance billions of dollars of government spending on virus relief as it steps up efforts to revive growth in Southeast Asia’s largest economy. Thursday’s cut was the central bank’s fourth so far this year.

A spurt in coronavirus cases across the archipelago has clouded the timeline for resuming normal economic activity and weighed on household consumption, which makes up almost 60% of Indonesia’s economy. The central bank said last month it expects the economy to grow just 0.9%-1.9% this year, and with demand sluggish, retail inflation has slumped to a two-decade low.

The rate cut may weigh on the rupiah, which has rebounded about 12% against the dollar since hitting a 22-year low in March, but has been the worst performer in Asia over the past month. Warjiyo said Thursday the currency has been pressured by global uncertainty, adding that it’s undervalued and has room to appreciate.

The central bank has said the outlook for the current-account deficit, a perennial weakness for Indonesia’s economy, is improving, with the country posting a trade surplus of more than $5 billion in the first half of the year and foreign investors being net buyers of government bonds in the past three months.

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