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Indonesia Cuts Key Interest Rate For Third Time

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Indonesia's central bank slashed its key interest rate in September for a third consecutive policy session, as it expects low inflation and weaker growth in the coming months, due to risks from trade tensions and global economic slowdown.

The Board of Governors, led by Governor Perry Warjiyo, decided to reduce the 7-day reverse repo rate by 25 basis points to 5.25 percent, Bank Indonesia said in a statement on Thursday.

The decision was in line with economists' expectations.

The previous change in the rate was a quarter-point reduction in August. The bank cut the rate for the first time since September 2017 in July this year.

Both the deposit and lending facility rates were reduced by a quarter-point each to 4.50 percent and 6.00 percent, respectively.

"The slowing economy and subdued inflation mean BI would certainly like to cut rates again in the coming months," Capital Economics economist Gareth Leather said.

However, the economist expects the bank to adopt a cautious approach, going forward, in tightening rates because the rupiah is likely to weaken against the US dollar if slowing global growth and the escalating trade war lead to a rise in global risk aversion.

"Given Indonesia's high level of foreign currency debt, we doubt the central bank would want to cut aggressively in those circumstances," Leather added.

The easing policy is consistent with the low inflation forecasts that are below the midpoint of the target, but attracts returns on investment in domestic financial assets, the central bank said.

The move is also a pre-emptive step to drive economic growth momentum beyond the impact of the global economic slowdown, the bank added.

The central bank retained its projection of the economic growth for this year to be below the midpoint of the 5.0-5.4 percent range before increasing towards the middle of the 5.1-5.5 percent range in 2020.

The bank continued to see inflation this year to be below the midpoint of the 3.5±1 percent target corridor and within the target range for 2020, namely 3.0±1 percent.

The current account deficit is predicted to remain within the 2.5-3.5 percent of GDP this year and next.

In other measures, Bank Indonesia lowered the loan-to-value ratio for property financing up to 5 percent and the LTV ratio for vehicle loans by 5-10 percent. Further, the bank announced additional reduction in LTV ratios for property loans and financing for eco-friendly vehicles by 5 percent.

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