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Financial News: Indonesia Likely To Cut Rates Again This Year:

Indonesia Likely To Cut Rates Again This Year: Capital Economics

09/25/2017 - 08:58:00 (RTTNews)

(RTTNews) - Bank Indonesia is likely to cut its interest rates further before the end of this year due to the economy's poor growth prospects and the subdued outlook for inflation, Gareth Leather, an economist at Capital Economics, said.

The Board of Governors of Bank Indonesia, led by Governor Agus Martowardojo, decided to cut the 7-day repo rate to 4.25 percent from 4.50 percent, on September 22. Majority of economists expected the rate to be left unchanged.

"The central bank's move is aimed at boosting the economy, which has struggled over the past few years," the economist observed.

The accompanying policy statement hinted that further rate cuts are likely to be gradual.

Leather expects just one more 25 basis point rate this year, as the rupiah continues to hold up relatively well.

The government is struggling to make much headway on economic reform.

Indeed, little progress has been made on improving the country's dreadful infrastructure and reforms to make the rigid labor market more flexible have so far been a failure.

Given this backdrop, Capital Economics forecast a growth rate of 5.0 percent for this year and next, which is slower than the consensus of 5.2 percent for 2017 and 5.4 percent for 2018.

"Inflation is unlikely to be a barrier to further easing," Leather pointed out.

Headline inflation eased to 3.8 percent in July from 4.4 percent in June and is expected to remain in the bottom half of the bank's 3 to 5 inflation target for this year.

In its statement, the central bank said the rate cut was "still consistent with its inflation forecasts for 2017-18".

The economist also noticed that the pace and timing of further easing is likely to be determined by the performance of the rupiah.

In its statement, BI said that "external risks, especially those related to the Fed have been taken into account", suggesting developments in the US will continue to have an important bearing on its decisions, the economist noted.

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