Bank Indonesia cuts key interest rate by 25 bps, likely to cut again in Q4

Bank Indonesia cut its 7-day reverse repo rate today by 25 basis points for the fourth consecutive month to 5 percent. The central bank made no changes to economic forecasts. BI expects the economy to expand at below the midpoint of its 5 percent to 5.4 percent forecast and anticipate 2020 growth to improve to the midpoint of its 5.1 percent to 5.5 percent estimate. The current account deficit is likely to stay in the 2.5 percent to 3 percent of GDP range, while inflation is seen below the midpoint of BI’s 2.5 percent to 4.5 percent target band in 2019, and within its 2 percent to 4 percent target band for 2020.

BI governor Perry Warjiyo stated that the central bank’s monetary and macroprudential stance is accommodative and that policy decisions would be dependent on data. The domestic growth-inflation dynamic underpins the case for further easing. Both headline and core inflation stay contained, while available data for the third quarter implies that economy economic activity stays sluggish, noted ANZ in a research report.

While the deceleration in investment growth seems to have eased, higher frequency data imply private consumption growth might be losing momentum. In the meantime, loan growth seems to have decelerated further in the third quarter. According to BI, the third growth is expected to come in around 5.05 percent year-on-year, which is unchanged from the second quarter outturn.

However, BI governor said that the economic activity is likely to rebound in the fourth quarter and beyond, aided by a rise in investment activity. This might in turn imply the need for aggressive rate cuts is subsiding.

“We now see scope for at least one more 25bp rate cut in BI’s easing cycle, bringing the policy rate to 4.75 percent, probably by year-end. A material improvement in Indonesia’s balance of payments dynamics or more aggressive-than-expected easing from global central banks would open the door for an even deeper easing cycle”, added ANZ.