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Bank Indonesia (BI) is expected to lower its benchmark interest rate by 25 bp to 4.75 percent on Thursday afternoon amid benign CPI inflation and slowing economic growth, according to the latest research report from Scotiabank.
Indonesia’s CPI inflation tends to be lower with the 2018 base year instead of 2012, which will lead to a higher real policy rate and provide additional scope for the Indonesian central bank to ease its monetary policy further.
In addition, the nation’s GDP growth slowed to a four-year low of 5.02 percent y/y in 2019, justifying our call for more rate cuts. In the medium term, yield-seeking foreign investors will return to Indonesia’s bond markets amid the BI’s dovish stance and accommodative external liquidity after net offloading a total of USD1.91 billion worth of local government bonds from January 27 to 14 February.
The IDR has been running a tight correlation with the 10Y Indonesian government bond yield, while remaining vulnerable to capital flight as portfolio investment inflows play a substantial role in financing the nation’s current account deficit and can be withdrawn at a short notice, the report added.
The BI said in a statement on February 10 that it expects Indonesia’s current account deficit to remain controlled this year at 2.5-3.0 percent of GDP as positive domestic economic prospects will continue to attract foreign inflows.
In 2019, the nation’s current account deficit narrowed to 2.72 percent of GDP from 2.94 percent the previous year on rising surplus in non-oil and gas trade balance. In addition, Indonesia has moved a step closer to passing a series of sweeping reforms, including submitting to the parliament a so-called omnibus bill on job creation on February 12 and considering a separate legislation on taxation aimed at lowering the corporate tax rate.
Meanwhile, earlier on February 11, Indonesian President Joko Widodo urged ministries to start spending budget as early as February in response to the threat of global economic slowdown arising from the coronavirus outbreak.
