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Indonesia Central Bank Unexpectedly Cuts Rate On Global Slowdown

Indonesia Central Bank Unexpectedly Cuts Rate On Global Slowdown
2/9/2012 2:46 AM ET

Indonesia's central bank unexpectedly slashed its key policy rate by a quarter-point on Thursday to boost economic growth amid deteriorating global economic conditions.

Bank Indonesia lowered the benchmark BI rate by 25 basis points to 5.75 percent after keeping it unchanged during the past two meetings. Economists had expected the bank's Board of Governors to keep the rate unchanged again at this meeting.

The central bank has reduced the rate by a cumulative 100 basis points since October last year to deal with the slackening global economy.

Last month, Bank Indonesia widened the lower range of the interbank lending rate, or deposit facility rate, to strengthen banks' liquidity management, which was widely seen as monetary easing move.

With the latest rate reduction, the lower and upper bounds of interest rate corridor of Bank Indonesia's monetary operation became 3.75 percent for overnight deposit facility and 6.75 percent for overnight lending facility. In January, the bank had widened the lower end of the deposit facility rate by 50 basis points to 200 basis points below the BI rate.

Bank Indonesia said it will continue to be vigilant on the risk of worsening global economy and the impacts of government's energy policy on inflation.

The bank noted that in the absence of government's policy to reduce fuel subsidy, inflation may continue to ease. The central bank has set an inflation target of 3.5-5.5 percent for both 2012 and 2013.

The Board of Governors said the economy is still quite resilient, although with a tendency towards lower growth due to weak global economic prospects. The bank expects the economy to expand 6.5 percent during the first quarter of 2012 and 6.3-6.7 percent in 2012.

The country's investment hopes received a boost in December, when it regained its 'investment grade' after 14 years from Fitch Ratings. Last month, Moody's also lifted Indonesia's ratings to investment grade, citing gains in investment spending, improved prospects for infrastructure development as well as a well-managed financial system.

The Southeast Asia's largest economy grew 6.5 percent in 2011, faster than the 6.1 percent expansion in the prior year, official figures showed earlier this week. It was the fastest growth rate since 1996. In the fourth quarter, GDP growth was steady at 6.5 percent.

by RTT Staff Writer

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