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Indonesia Cuts Interest Rates For Third Time This Year

Indonesia's central bank slashed its key interest rate for a third time this year on Thursday in a bid to support the economy that has been severely hit by the coronavirus, or Covid-19, pandemic.

The Board of Governors agreed to lower the BI 7-day reverse repo rate by 25 basis points to 4.25 percent, the Bank Indonesia said in a statement. Economists had expected the bank to leave the rate unchanged.

The bank had kept interest rates unchanged in the previous two sessions. The last change in the rate was a 25 basis points reduction on March 19.

The central bank also lowered the deposit facility rate and the lending rate by 25 basis points each to 3.50 percent and 5.00 percent, respectively.

"The decision is consistent with efforts to maintain economic stability and nurture economic recovery momentum in the COVID-19 era," the central bank said.

Bank Indonesia still sees room to lower interest rates in line with mild inflationary pressures, maintained external stability and the need to stimulate economic growth.

"Policy to stabilize rupiah exchange rates and quantitative easing will be continued," the bank said.

Further, Bank Indonesia said it has decided to implement requirement remuneration for banks meeting daily and average rupiah reserve requirements of 1.5 percent per year based on 3 percent of deposits, effective August 1.

"With well-behaved inflation and the currency enjoying some stability, we expect governor Warjiyo to cut policy rates further in 3Q with the economy sorely in need of additional stimulus from both fiscal and monetary authorities," ING economist Nicholas Mapa said.

The central bank expects economic output to decline in the second quarter, though latest data signal milder pressures, and that the economy hit a low and is now entering a recovery phase.

Bank Indonesia expects the economic recovery process to gain momentum in the third quarter after the government relaxes large-scale social restrictions in the middle of June 2020, coupled with the policy stimuli already implemented.

The central bank projected 0.9-1.9 percent GDP growth for this year and sees the figure rebound to 5.0-6.0 percent in 2021 on the back of global economic gains as well as monetary and fiscal policy stimuli.

The current account deficit forecast was cut to around 1.5 percent of GDP in 2020, much lower than the 2.5-3.0 percent of GDP projected previously. The shortfall is seen below 2.5-3.0 percent of GDP in 2021.

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