Indonesia cuts rates for first time since February

rupiah Image copyright Getty Images

Indonesia's central bank has cut its benchmark interest rate to 7.25% from 7.5% in an attempt to give its struggling economy a boost.

It is the first time that the bank has cut interest rates since February last year.

Low inflation and weak fourth quarter economic growth numbers were some of the reasons cited for the cut.

The bank's decision was announced as deadly bombs and gunfire attacks rocked the country's capital, Jakarta.

Earlier this week, analysts were divided on whether or not Bank Indonesia (BI) would make a move. The country has been been facing its slowest pace of growth since 2009 and a weakening currency.

However, they said the bank had clearly given priority to boosting the economy over worries that a looser policy would push the currency down further.

The rupiah depreciated by some 10% in 2015 and has since fallen a further 0.7% this year.

Image copyright AFP
Image caption The Indonesian rupiah fell to a four-week low in December

Further cuts?

Gundy Cahyadi, an economist with DBS in Singapore, said the bank could follow up with another rate cut this quarter - depending on the stability of the rupiah.

"Certainly, this is not a done-deal, given how BI will still focus on maintaining rupiah stability in the market, amidst the lingering uncertainties in global markets."

Capital Economics' Daniel Martin said: "Looking ahead, with the economy growing at its weakest pace since the global financial crisis and inflation set to remain low, further loosening looks likely."

However, he added that BI was likely to take a fairly cautious approach.

"Over the past year, BI has been paying at least as much attention to the rupiah as it has to the strength of the economy.

"Cutting rates too aggressively could cause the current account deficit to widen again, which would increase the rupiah's vulnerability to an external shock."

In December last year, the US Federal Reserve raised its interest rates by a quarter of a percentage point - its first increase since 2006.

When the US raises rates, the US dollar tends to rise, which means other currencies weaken against it.

The move was widely expected to cause ripples around the world - particularly for developing nations such as Indonesia - many of which have seen slowing growth.

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