Bank Indonesia surprisingly lowers policy rate, may cut again in Q4

The Indonesian central bank, Bank Indonesia, unexpectedly lowered its policy rate on Tuesday. The policy rate was cut by 25 basis points. The rate cut was greatly to address subdued economic and credit growth.

The economic growth is expected to struggle to reach the upper end of the central bank’s target of 5 percent to 5.4 percent after recording 5 percent in the first half of this year, stated ANZ. High frequency consumption and investment indicators show a similar picture. Consumption indicators, such as sales of motor vehicles and motor-cycles, have been shrinking. Retail sales are growing, but at a slower rate and in sharp contrast to the more upbeat consumer sentiment data, noted ANZ in a research report. Meanwhile, investment indicators have selectively risen.

Fiscal policy is not expected to be a major support to growth in the near term, in spite of the recent upward revision of the 2017 budget deficit to 2.9 percent of GDP from the initial target of 2.4 percent. The revision shows a shortfall in tax collections – itself an outcome of weak growth. On the expenditure front, the decision to halt additional rises in power tariffs for the rest of the year is adding to a wider deficit.

Furthermore, even reaching the 2.9 percent target might be difficult, thanks to institutional constraints in meeting targeted expenditures. The authorities have implied that the realised deficit might be lower at 2.67 percent of GDP.

Therefore, the combination of weak macro data, within-target inflation and diminished external vulnerabilities do make a case for additional easing. The Bank Indonesia is expected to cut one more time in the fourth quarter of this year, added ANZ.

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