Indonesia's central bank cuts key rate to help weak economy

JAKARTA (REUTERS) - Indonesia's central bank, which resisted cutting its benchmark interest rate for months, did so on Thursday in a bid to lift an economy growing at its slowest rate in six years.

The benchmark policy rate was lowered by 25 basis points to 7.25 per cent, while the overnight deposit facility rate and lending facility rate were also cut by the same amount to 5.25 per cent and 7.75 per cent respectively.

The last time the benchmark rate was changed was in February, when it was reduced by 25 basis points to 7.50 per cent.

The decision was announced hours after explosions and gunfire in central Jakarta less than two kilometres from where Bank Indonesia (BI) was holding its first policy meeting of 2016.

Ten of 16 analysts in a Reuters poll had predicted a rate cut on Thursday.

Some analysts expect Thursday's cut will be the first in an easing cycle. BI said it will assess the need for further monetary policy loosening in future.

The rupiah, whose stability has been a prime concern for BI, weakened after the Jakarta attacks and strengthened slightly after the rate cut announcement. It shed 0.8 per cent to 13,939 a dollar, while the Jakarta Composite Index of shares fell 1.7 per cent.

"The initial response was typical for such tragic news, and that is the rupiah weakened sharply," said Sue Trinh, head of Asian foreign-exchange strategy at Royal Bank of Canada in Hong Kong. "But the market looks to be paring back on that."

Economists welcomed the rate cut.

The move "should provide a long-overdue boost to the struggling economy," said Daniel Martin at Capital Economics in Singapore.

At policy meetings since October, Bank Indonesia (BI) has said it saw widening room to loosen monetary policy, but it had refrained from cutting its benchmark rate ahead of the Federal Reserve's first U.S. rate hike in nearly a decade. BI was concerned lower domestic rates could spark capital outflows and weaken the fragile rupiah.

In 2015, the rupiah was Asia's second-worst performing currency, falling by 10 percent against the dollar and touching 17-year lows.

But in the fourth quarter, it was best performing one with a 6.2 per cent jump. It has not been as badly hit as many other currencies by the early 2016 emerging market rout.

The easing of annual inflation to a six-year low of 3.35 per cent in December has provided room for the rate cut.

Growth in Southeast Asia's largest economy is expected at the bottom of BI's target range of 4.7-5.1 per cent in 2015, making it the slowest since 2009.

The central bank has said 2016 growth is expected at 5.2-5.6 per cent.