Indonesia’s domestic conditions warrant additional easing, BI lowers 2016 growth outlook

Bank Indonesia kept the new reference rate at the same level during its unusually long meeting on 18th -19th August. The level was maintained at the level seen during the reference period. This is despite the continuous macroeconomic and rupiah stability and in spite of firmer than anticipated second quarter GDP outturn, said ANZ in a research report.

The Indonesian central bank is dovish. The expression of BI’s policy statement implies that an easing bias continues with domestic conditions warranting additional easing, according to ANZ. Bank Indonesia lowered its projection range for economic growth to 4.9 percent-5.3 percent year-on-year for 2016 from its earlier forecast range of 5 percent-5.4 percent. The central bank lowered the outlook due to expected deceleration in public spending in the second half of 2016.

Slowing inflation, and stability in exchange rates and current account deficits have created policy space for rate cuts, stated ANZ. Nonetheless, the central bank has opted to err on the side of caution, temporarily halting its current easing cycle. Particularly, Bank Indonesia continues to be cautious that market volatility emerging from possible Fed funds hike might result in macro instability.

The extent of easing would rely on the size of tax amnesty inflows and in combination with loosened loan-to-valuation ratios for amnesty inflows that flow into banks, how rapidly these would be lent, noted ANZ. At this point, the tax amnesty that lasts until March 2017 has so far collected just IDR 757 billion. This is only 0.5 percent of IDR 165 trillion the government aims to collect by the end of December.

Indonesia could still come out as a regional growth outperformer in the second half of this year. Moreover, the outperformance could be continued well into 2017, particularly with additional efficient policy mechanisms and coordination, significantly friendlier lending environment and deeper financial markets. The risks surrounding the consensus growth projection for this period are evidently tilting to the upside, according to ANZ.