Amid slowing inflation and signs of worsening economic conditions, the central bank cut Wednesday its key interest rate to boost growth.
Bank Indonesia slashed the interest rate by 50 basis points to 8.25 percent, meaning that it has cut the rate by 1.25 percent since December, when the economy began feeling the pinch of the global economic meltdown.
On Wednesday, BI issued a statement saying the global economic outlook was worse than anticipated, with the deepening global meltdown slashing export demand.
“Several indicators show the global economy is gloomier than estimated several months ago,” the statement said, with the “sectors related to foreign trade” being hit the hardest.
The Central Statistics Agency (BPS) reported earlier in the week that the country’s exports had fallen victim to weak demand and lower commodity prices, dropping by 20 percent from a year earlier.
December’s export drop emulates the trend since October, when the global financial crisis began setting in.
BI Interest rate: (JP/Irma)
The lower BI rate will encourage economic activities and growth, as the cost of borrowing becomes cheaper for both companies and individual consumers.
Indonesia expects the economy to grow by between 4.5 and 5.5 percent this year, slower than an estimated 6.2 percent last year.
Economists have said that to achieve this growth rate, bank lending needs to grow by between Rp 250 trillion and Rp 300 trillion.
Following the declining trend in the BI rate, interest rates for bank lending are also on the decline.
Bloomberg reported that since December, interest rates for bank loans have gone down from 16.47 percent to 16.44 percent on average.
With inflation expected to continue to ease off in the following months amid falling prices of key global commodities, the central bank sees more room for another rate cut.
“If inflation slows next month, there is room for further interest rate cuts,” BI senior deputy governor Miranda Goeltom said Wednesday.
The consumer price index, which measures inflation, declined in January 2009 and December 2008, data from the BPS shows.
Economists have welcomed BI’s rate cut, but expect the central bank to reduce the cost of borrowing even further at a time of easing inflation.
“We are expecting inflation rates to go down further. Therefore there is no reason for the central bank to not cut the interest rate further,” HD Capital head of research Adrian Rusmana said.
Danareksa chief economist Purbaya Sadewa also called for more cuts to be able to stimulate the economy faster.
However, Fauzi Ichsan, an economist with Standard Chartered Bank, urged BI to be cautious in lowering the rate without taking into account the value of the rupiah, which has declined by more than 20 percent within the past year.
The stock market responded positively to the rate cut, with the main index climbing 1.2 percent to close at 1,320.36.
