Indonesia uses new interest rate to boost economy

By AFP   August 20, 2016 | 12:06 pm GMT+7

"With growth struggling and inflationary pressures low, a rate cut is likely sooner rather than later." 

Indonesia's central bank Friday began using a new benchmark interest rate it hopes will transmit changes in borrowing costs more quickly, as policymakers seek fresh ways to boost the economy.

Bank Indonesia left the new benchmark, called the seven-day reverse repo rate, unchanged at 5.25 percent. Analysts had been split on whether the bank would make a cut on the new rate's debut.

Southeast Asia's top economy has been slowing in recent years as demand for its key commodities exports has dropped, particularly from regional powerhouse China, and policymakers have been scrambling to find new ways to lift the country's fortunes.

The central bank had already cut its old benchmark four times this year but analysts say that the moves were failing to persuade commercial banks to lower their own lending rates, meaning the changes were not having a major impact on the real economy.

The new rate, which is a shift from the old, 12-month reference rate, has a more short-term focus and the bank hopes it will help them influence markets more quickly and directly.

"Our monetary policies will be more effective and efficient when interpreted by the markets," said Bank Indonesia governor Agus Martowardojo, referring to the new rate.

While the benchmark rate was left on hold, the lending facility rate at which commercial banks can borrow from Bank Indonesia was cut by 100 basis points to 6 percent.

Despite Friday's decision, Capital Economics forecast a reduction in the benchmark rate soon.

"With growth struggling and inflationary pressures low, a rate cut is likely sooner rather than later," it said in a note.

President Joko Widodo came to power almost two years ago on a pledge to boost growth in the G20 economy, but has struggled to get key projects off the ground due to the dim global outlook and Indonesia's notoriously difficult business environment.

The economy expanded faster than expected in April-June, at 5.18 percent, but it was still below growth rates of over six percent seen several years ago.

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