RTTNews - Indonesia's central bank lowered its key interest rate for the seventh consecutive month to a new record low.
The Bank Indonesia cut its benchmark rate by 25 basis points to an all-time low of 7% in June. The rate cut came in line with expectations. This is the lowest level since July 2005, when the measure was first introduced.
In May, the central bank slashed its benchmark rate by a quarter point to 7.25%. The latest cut has resulted in a cumulative reduction of 250 basis points since December last year.
As they battle the worst global recession since the Second World War, central banks across the globe have lowered their interest rates. Among the major central banks in Asia, the Bank of Japan brought its key rate to a level close to zero and the Bank of Korea kept it at 2% for the third straight month in May to assess the functioning of previous reductions.
The central bank said its economic growth estimate for 2009 continued to remain in the high range of 3%-4%. In the first quarter, the country's GDP grew 4.4%, supported by consumption growth of both households and the government. However, the pace was much slower than the 5.2% witnessed in the final quarter of 2008. The central bank said though there were early signs that the global economy is improving, the economic downturn among its major trading partners continue to put pressure on Indonesia's export performance. The country's exports dropped 22.55% year-on-year in April.
Regarding inflation, the Bank Indonesia noted that inflationary pressures continued to ease supported by the strengthening rupiah. The central bank remains cautious about the potential inflationary pressure in 2010 together with the estimated increase in world commodity prices. However, the inflation level in May at 6.04% was still in accordance with the original estimates of 5%-7% for 2009, the central bank said.
On the financial sector front, the central bank said banking conditions remained good, with the bank as well as money market liquidity seeing an increase. At the same time, the central bank said banks' response to the cut in interest rate remained largely limited, as the credit growth and the interest rate reductions were below expectations.
The recent strengthening of the rupiah represents a positive contribution to overall macroeconomic stability, the central bank said. The improvement in the balance of payments and robust foreign exchange reserves are the key factors supporting the stability of the rupiah, the central bank said.
The Asian Development Bank forecasts Indonesia's economic growth to slow to 3.6% in 2009 from 6.1% recorded in 2008. However, the growth is expected to pick up to 5% in 2010, if the global economy recovers in the second half of 2010 as assumed.
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