Bank Indonesia lowers interest rate by 25 bps to 3.75 pct, unlikely to cut further

Indonesian central bank lowered its key policy rate by 25 basis points to 3.75 percent. Today’s cut is the first since July. The decision to cut rate reflects a desire to help the economic rebound and comes on the back of a material recovery in the IDR following an improvement in global risk sentiment in recent weeks. Selling pressure on the IDR had eased since Bank Indonesia’s last meeting, with the currency gaining 4 percent against the USD since.

BI, in its accompanying statement, stated that it is of the view that the IDR is still fundamentally undervalued, and sees the potential for the rupiah to strengthen further. BI Governor Perry Warjiyo repeated that the central bank will continue to keep an accommodative stance, but he clarified that this is not limited to its policy rate. He also sounded optimistic regarding growth, anticipating the economic rebound to continue and that GDP growth might turn positive in the fourth quarter.

“We are less optimistic about the growth outlook. Available October data such as imports, car sales, retail trade and consumer sentiment are not pointing to a sharp turnaround in the economy, which contracted by 3.49 percent y/y in Q3”, said ANZ in a research report.

In the meantime, headline inflation has been below the lower bound of BI’s 2 percent to 4 percent target band since June, while core inflation has decelerated for seven consecutive months as of October. Moreover, a recent resurgence in virus cases threatens the delay in reopening the economy further and drag on the pace of recovery.

“Overall, the challenging growth environment warrants continued policy accommodation. But for now, we are not pencilling in further rate cuts, although we acknowledge another opportunistic cut cannot be ruled out should the IDR rally gain stronger momentum. Instead, we expect quantitative easing to remain BI’s primary tool of support”, added ANZ.