Indonesia central bank makes year's 3rd rate cut, trims GDP outlook

Bank Indonesia cut the seven-day reverse repurchase rate by 25 basis points, the lowest since 2018. PHOTO: REUTERS

JAKARTA (REUTERS) - Indonesia's central bank on Thursday delivered its third cut to the benchmark rate this year, stepping up support for South-east Asia's largest economy as it struggles to avoid a recession amid the broadening fallout of the coronavirus pandemic.

Bank Indonesia (BI) cut the seven-day reverse repurchase rate by 25 basis points (bps) to 4.25 per cent, the lowest since 2018, as predicted by the majority of economists in a Reuters poll. The move came a day after the finance minister warned of recession risks, with gross domestic product (GDP) expected to shrink by 3.1 per cent in the second quarter - the first contraction since 1999 - and possibly contract again in the following three months.

Governor Perry Warjiyo pledged to keep all of BI's instruments "accommodative" and said there was room for further monetary easing, while trimming BI's outlook for 2020 GDP growth to 0.9-1.9 per cent from 2.3 per cent.

"We say there is room for further rate cuts. The timing would depend on global conditions and ensuring the stability of the rupiah is maintained," Mr Warjiyo told a virtual briefing, adding that growth would bottom in the second quarter and then recover.

The rupiah strengthened a touch to trade below the 14,000 to the dollar level, while the main stock index pared falls to trade down 0.2 per cent after the announcement.

Mr Warjiyo said the currency was undervalued and could strengthen for the remainder of the year.

In total, BI has trimmed its key rate by 75 bps so far this year to stimulate economic activity, on top of four reductions amounting to 100 bps in 2019. Wisnu Wardana, an economist at Bank Danamon Indonesia, said while BI had cut the growth outlook, policymakers were noting easing concerns over the pandemic and financial market turmoil. "We still project another 25 bps cut in policy rates this year," he said.

The government has budgeted nearly US$50 billion to support the pandemic-hit economy, but had only doled out a small amount. The country has recorded more than 41,000 coronavirus cases, the highest number in South-east Asia, with 2,276 deaths as of Wednesday.

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