Bank Indonesia (BI) lowered its rate for the third consecutive time yesterday, cutting its entire policy corridor by 25bps, with the reference, Fasbi/deposit and repo rates being lowered to 6.75%, 4.75% and 7.25% respectively. There was no cut in the reserve requirement ratio as the 100bp reduction to 6.5% announced in February took effect yesterday. The two RR cuts will indicate that a total of IDR 52trn in liquidity might possibility be injected in the banking system and loaned out to the real economy to boost growth.

More importantly, the financial services agency, OJK, also intends to considerably cut its cap on deposit rates from April. Separately, the Widodo administration is also interested to cap the interest rate paid on time deposits owned by the government and state-owned firms at 5%.

With the stimulus measures introduced by the central bank, it is important to be wary of policy over-kill. If the central bank continues to ease policy aggressively, the boost to growth and inflation might turn out to be larger than hoped for in the later part of 2016. Only recently inflation has decelerated to the BI’s target rate of 3-5%, but the current reading of 4.4% y/y might easily push inflation above the target rat in an environment of stimulus overload.

BI stated yesterday that it will “become more careful in easing policy”. However, it is important that after lowering rates three consecutive times, the central bank should show a strong commitment to its statement in the following months and ease at a slower rate going forward. There is room for one more rate cut of 25bp to 6.5% in 2016 with growth still moderately below its long-term potential. However, the central bank should wait till later in Q2 2016 to cut rates.

“Based on our CPI assumption of 4.4% this year, this implies a more reasonable real policy rate of 2.00%, in line with Indonesia's historical experience”, says HSBC.