Indonesia Confidently Cuts Its Key Interest Rates For Three Straight Months
Bank Indonesia's logo is seen at its headquarters in Jakarta, Indonesia, January 17, 2019.

(Photo: REUTERS/Willy Kurniawan)

Indonesian central bank's decision to cut interest rate for three straight months and bring a total reduction of basis points (bps) to 75 this year got brought about by the Federal Reserve's lowering of US borrowing costs that coincided with higher oil prices and trade issues.

Likewise, Indonesia relaxed its rules for property and vehicle loans as part of the country's macroprudential plans to jump-start growth in Southeast Asia's biggest economy which had been stuck in a low growth rate two years in a row.

Bank Indonesia governor Perry Warjiyo confirmed that this move is "to support the momentum of domestic economic growth" during a slow global economy.

Warjiyo added that the policy "is consistent with an estimate for inflation to remain low at below the midpoint of our target range."

Cutting interest rates speaks of a country's outlook of its economy and the latest lowering bps for the third straight month is seeing the growth of 5.1 percent only compared to the initial forecast of 5.3 percent.

Warjiyo denied that the Fed cut affected the bank's latest move stating it will maintain and "accommodate policy mix in line with low inflation forecasts" to continue to drive Indonesia's economic growth.

He stated that the country's monetary stimulus will increase consumption, economic growth, investment and make everybody happy.

Indonesia's central bank's target for inflation is at the 2.5-4.5% range.

Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd in Singapore said that the decision of lowering key interest rate shows that growth concerns are "at the forefront for BI."

Policymakers are worried about Indonesia's current account deficit that widened to 3 percent of the gross domestic product in the second quarter.

Though Bank Indonesia is supporting growth and investment during these times when loan growths are slow, "the Fed's new dot plot" indicates that the cutting style is almost finished according to Wisnu Wardana, a Jakarta-based economist at PT Bank Danamon Indonesia.

The central bank of Indonesia may go on carefully on its policy path especially after the new inflation threats from an oil price shock.

Tan added that given the never-changing and challenging growth environment, further easing will be a further 25 basis points rate cut before the year ends reinforcing growth trumping currency stability as the driver of Indonesia's central bank policy.