Bank Indonesia cuts policy rate by 25 bps, likely to further lower rate by 50 bps by end-2019

Bank Indonesia lowered its 7-day reverse repo rate today by 25 basis points to 5.50 percent, marking the second consecutive month it cut its policy rate. In spite of the rise in the USD/IDR in recent weeks, the central bank opted to cut its policy rate today, with Governor Perry Warjiyo citing a desire to underpin growth pre-emptively, a backdrop of manageable inflation and the relatively attractive return on Indonesian assets as key factors behind the central bank’s decision.

The Bank Indonesia has not made any significant changes in the economic forecasts for this year. BI expects growth of below 5.2 percent, while inflation is expected to come in below the midpoint of its 2.5 percent to 4.5 percent target band and a current account deficit of 2.5 percent to 3 percent of GDP. For 2020, it is projecting growth of 5.1 percent to 5.5 percent, inflation at about 3 percent, and the current account to stay in the 2.5 percent to 3 percent of GDP range.

The governor, in its press conference, hinted at policymakers’ desire to push growth momentum and stated that the central bank will maintain an accommodative policy stance, implying the easing cycle has further to go, noted ANZ in a research report.

The macro picture underpins the case for a more accommodative policy stance. The second quarter GDP outturn was weak, with growth easing a bit to 5.05 percent year-on-year in the second quarter, the softest reading in two years. Available data for the third quarter so far have yet to indicate a significant turnaround.

“Accordingly, we are now pencilling in a more aggressive easing cycle and expect BI to lower its policy rate by 50bps to 5.00 percent by end-2019 (as opposed to our earlier forecast of 5.25 percent by Q1 2020). Even so, the persistence of a relatively high current account deficit will constrain BI from unwinding the 175bps worth of hikes it implemented in 2018”, added ANZ.