Indonesia’s central bank has trimmed a lending rate from 7 per cent to 6 per cent in what one analyst dubbed “stealth easing”. But for now, it has opted to leave the repo rate, its new benchmark, at 5.25 per cent.

Ahead of the decision late on Friday, half of 22 economists surveyed by Bloomberg were expecting some form of easing. Some still expect more cuts to the benchmark rate.

Bank Indonesia had kicked off the global easing party with a rate cut in January, with further cuts in February, March and June. Policymakers are trying to stoke growth and encourage consumer spending as the shine has come off the world’s commodity price boom in the wake of China’s slowdown. Today, the central bank said it expected growth to remain “sluggish”.

In a statement, it said:

Despite improving on the back of increased consumption and improvements in the labor sector, the US economy in Q2 grew below projections due to weak investment data. In addition, the US economy remains beset with uncertainty, with the Fed Funds Rate hike expected only once in 2016. Meanwhile, moderate economic growth is forecasted in Europe, overshadowed by the Brexit. Moderate economic growth in China is expected because public investment has thus far failed to stimulate an indebted private sector that is at overcapacity. On the other hand, in the commodity markets, the global oil price, while remain low, shows early indications of a rebound. Nonetheless, the prices of several salient export commodities from Indonesia are starting to improve, including CPO, coal and tin.

Monetary policy transmission through the credit channel is not yet considered optimal, evidenced by limited credit growth. Credit growth at the end of Q2 is at 8.9% (yoy), increased from 8.7% the previous quarter. On the other hand, deposit growth was observed to slow from 6.4% (yoy) the previous quarter to 5.9% (yoy). Bank Indonesia expects the looser monetary and macroprudential policy mix, coupled with the tax amnesty, to stimulate credit growth and, therefore, encourage future economic growth.

Indonesia’s economy grew more than expected in the second quarter, but the central bank lowered its 2016 GDP outlook to between 4.9-5.3 per cent against a previous forecast of 5 and 5.4 per cent. At its peak, growth was running at a healthy 6 per cent.

Win Thin at US bank BBH says:

We got some stealth easing. The new policy rate of 5.25% is lower than the old one at 6.5%, and BI also narrowed the corridor around the 7-day rate by cutting the Lending Facility rate 100 bp to 6.0% while the overnight deposit rate was left unchanged at 4.5%. Officials also said that the monetary policy transmission would be better under the new policy rate.

Officials obviously left the door open for further easing.

Gareth Leather at Capital Economics notes:

The economy could do with more support. Although growth picked up in the second quarter, the acceleration was largely due to a sharp rise in government spending, which is unlikely to be repeated given the government’s need to rein in spending in order to meet its deficit target.

[Clarification: This post has been amended to make it clearer that the new benchmark rate has remained unchanged. Only the lending rate has been trimmed today.]

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