Bank Indonesia keeps key interest rate on hold at 5 pct, likely to cut rate in December

Bank Indonesia kept its 7-day reverse repo rate on hold at 5 percent today, following a 25 basis points cut in each of its prior four meetings. BI also cut its RRR by 50 basis points to 5.5 percent for commercial banks and 4 percent for Shariah banks, effect 2 January 2020, with the average ratio remaining at 3 percent. This was in order to boost banking sector liquidity. Bank Indonesia anticipates this to add IDR 24.1 trillion in liquidity for commercial banks and IDR 1.9 trillion for Shariah banks.

Bank Indonesia forecasts the economy to grow 5.1 percent this year, while inflation is expected to come in at 3.1 percent. The current account deficit is anticipated at 2.7 percent of GDP, while loan growth is expected at around 8 percent.

BI noted that it still sees scope for policy easing. It expects the Indonesian rupiah to strengthen in line with rebounds in the balance of payments and is of the view that the uncertainty in global financial markets has eased a bit, and continues to be conducive for capital inflows into developing economies.

The sluggish economic growth and contained inflation both support an easing bias. The third quarter economic data indicated growth easing to its softest reading in two years, with the breakdown revealing a widespread deceleration in domestic demand. On the inflation front, both headline and core readings continued to be below the mid-point of BI’s 2.5 to 4.5 percent target band.

However, with the U.S. Fed appearing cautious of lowering its policy rate further, the central bank has less leeway to trim its policy rate without undermining the relative yields of domestic financial assets.

“Overall, we think BI’s easing cycle is nearing its end; we maintain our forecast for one more 25bp rate cut from the current rate. While we currently have the cut pencilled in for December, it is also conceivable that BI will opt to make its next move only in Q1 2020, especially if risk sentiment deteriorates in the coming weeks”, said ANZ.