JAKARTA: Indonesia's central bank said on Thursday it was lowering the amount of cash banks must hold as reserves by $1.8 billion in a bid to stimulate new lending and boost an economy that is growing at its slowest in more than two years.
As expected by analysts polled by Reuters, Bank Indonesia kept its benchmark seven-day reverse repurchase interest rate rate unchanged at 5.00%, having already cut it four times this year by a total of 100 basis points (bps).
Despite the past rate cuts and relaxed lending rules introduced to help counter a global slowdown, Southeast Asia's largest economy saw growth slide to 5% in the third quarter, the slowest since the second quarter of 2017, as weak export earnings hit consumption, investment and government finances.
Governor Perry Warjiyo said BI would lower the reserve requirement ratio for banks by 50 basis points, to 5.50% for conventional banks and 4% for Islamic banks, from Jan 2, freeing up 26 trillion rupiah ($1.84 billion) of additional liquidity for lenders.
He said loan growth had suffered from sluggish demand from businesses. The central bank cut its outlook for loan growth to 8% this year, from a range of 10%-12% previously.
BI had last trimmed the ratio in July, also by 50 bps.
"Corporates are still measuring future economic prospects...because this will affect how much they will increase production capacity," Mr Warjiyo told a news conference, noting that production had declined.
"We see that our economy is improving going forward and this should improve economic prospects and corporates' confidence," he said, adding that BI will continue to make its policy accommodative to support growth.
Some economists expected BI to resume its rate-cutting cycle after a pause.
The rupiah closed at 14,080 a dollar on Thursday, up from 14,110 against the dollar around the time of BI's announcement, while the stock market trimmed its losses.
Indonesia's economy has suffered from the fall-off in global trade amid a prolonged tariff war between the United States and China, but Warjiyo said economic growth was likely to improve in the fourth quarter due to seasonal patterns.
BI's forecast for 2019 GDP growth was 5.1%, he said, in line with previous estimates.
BI's inflation forecast was 3.1% at the end of the year, within its target range. It also forecast that the current account deficit would narrow to 2.7% of GDP for 2019, down from 3% of GDP in 2018.
Enrico Tanuwidjaja, an economist with UOB Indonesia, said inflation may accelerate going forward due to a likely removal of subsidies, while BI's objective to keep the current account deficit in check would require a "less loose" monetary policy.
"Therefore, we expect BI to hold its benchmark interest rate at 5.00% till end-2019," he said, adding that other tools could be used to boost economic growth.
Capital Economics said BI's reserve requirement cut "should provide a boost to growth but is less likely to put downward pressure on the currency than an interest rate cut".
But noting the governor's growth concerns, the consultancy believes the rate-cut cycle will continue soon, predicting two more reductions.
Last year, BI raised its key rate by 175 basis points to halt capital outflows linked to US monetary tightening that put the rupiah under pressure.