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Bank Indonesia Signals Rate Cuts After Lowering Reserve Requirement

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Indonesia's central bank left its key interest rate unchanged for a seventh month in a row in June, but cut the reserve requirement for banks to ensure adequate liquidity to boost lending, and signaled that rates are set to be reduced in future.

The Board of Governors decided to hold the 7-day reverse repo rate at 6 percent, the Bank Indonesia said Thursday, in line with economists' expectations.

The bank had raised interest rates by a cumulative 175 basis points between May and November last year.

The deposit facility rate was maintained at 5.25 percent and the lending rate at 6.75 percent.

The bank trimmed the rupiah reserve requirement for banks by 50 basis points to provide sufficient liquidity in the banking system to support lending to the real economy.

The reserve requirement reduction will take effect on July 1.

The central bank said it "constantly monitors global financial market dynamics and the external stability of the national economy when considering reductions to the policy rate in line with low inflation and the current need to stimulate domestic economic growth."

Bank Indonesia Governor Perry Warjiyo told reporters that the central bank will cut interest rates in future and it was just a matter of "timing and magnitude".

Central banks across the world has embarked on an easing trend as the global economy slows due to trade tensions and other geopolitical concerns.

The US Federal Reserve on Wednesday signaled that it was open to more rate reduction in the near-term.

Australia, New Zealand, India, Malaysia and Russia, among others, have cut interest rates this year and some have signaled more easing in future.

Elsewhere on Thursday, central banks in Japan, Taiwan and the Philippines held interest rates steady, while their Norwegian counterpart hiked them and signaled more tightening this year.

The Indonesian central bank said the economic growth momentum softened in the second quarter due to weaker exports. The bank forecast economic growth below the midpoint of the 5-5.4 percent range this year.

Inflation is expected to be below the midpoint of the 3.5±1 percent target corridor for the year.

"Given the clear hints at rate cuts in today's statement and the dovish tone struck by BI officials over the past couple of weeks, we are now forecasting one 25bp interest rate cut this year, most likely at BI's next meeting in July," Capital Economics economist Franziska Palmas said.

"The upshot is that, while we now expect rates to be cut this year, we are not anticipating a prolonged or aggressive easing cycle," the economist added.

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