The decision to lower the key rate, locally known as BI Rate, was also taken to anticipate global economic slowdown that might have an effect on the domestic economy, Bank Indonesia Governor Darmin Nasution said.
Jakarta (ANTARA News) - Bank Indonesia (the central bank/BI) decided Tuesday to cut its key rate by 25 basis points to 6.5 percent on confidence the country`s inflation rates will stay at below 5 percent this year and next year.

The decision to lower the key rate, locally known as BI Rate, was also taken to anticipate global economic slowdown that might have an effect on the domestic economy, Bank Indonesia Governor Darmin Nasution said on Tuesday.

He said the weakening global economy had prompted a number of developing countries, including Turkey, Brazil and Israel to cut their interest rates to maintain their economic growth without having to much rely on the global economy.

"If the global economy weakens the inflation rate will fall accordingly and many countries will focus on domestic growth rather than on inflation rate. We have been trying to give the best possible answer to it by lowering BI Rate," he said.

With the global economic slowdown, the country`s inflation rates this and next year were projected to stay at below 5 percent. If the BI Rate remained unchanged at 6.75 percent the difference between interest and inflation rates would be too large, he said.

"The inflation rate is projected to reach 4.5-4.6 percent this year so if the policy rate of 6.75 percent is too high it needs to be corrected because since the past the difference between BI Rate and inflation rate has not been large," he said.

On the impact of the decline in BI Rate on the money market, he said the impact would not be too large because the market would consider it as having met the existing condition.

"Psychologically, the impact will be there. But the decline is more reasonable so the impact will be related to calculation," he said.

Perry Warjiyo, the central bank`s director of monetary and economic policy research, said the drop in the key rate to 6.5 percent would have no impact on foreign capital flows in the country.

"The level still attracts foreign investors in the financial portfolio so there is no need to worry about a sudden reversal of foreign capital," he said.(*)

Editor: Aditia Maruli Radja
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