Bank Indonesia cuts key interest rate by 25 bps, likely to cut further

Bank Indonesia lowers its 7-day reverse repo rate by 25 basis points to 5.75 percent today. The decision to cut key rate follows the central bank’s move to lower its Reserve Requirement Ratio during its meeting last month and marks the first time it cut its policy rate since September 2017. The desire to underpin economic growth and the expectation for low inflation were cited as the key factors behind the decision. Recent stability in the Indonesian rupiah also gave a favourable overlay for monetary easing.

The central bank sees the second quarter GDP growth at a similar rate to the first quarter and continues to expect full-year 2019 growth to come in at the lower end of its 5 percent to 5.4 percent target range. It also maintained its forecast for inflation to average below the midpoint of its 2.5 percent to 4.5 percent target band and for the current account deficit to narrow.

BI Governor Perry Warjiyo in the press conference hinted at further easing. He stated that the central bank’s policy stance is aimed at pushing growth and that the BI “sees more room for monetary policy adjustment”. He also stated that the central bank’s baseline is now for one U.S. Fed rate cut in 2019.

“For our part, we expect the US Fed to cut its policy rate by 50bps in the coming quarters, which in turn would give BI more scope to trim its policy rate”, said ANZ in a research report.

However, the current account deficit continues to be a potential source of vulnerability. While Indonesia’s trade balance seen a small surplus for the second straight month in June, it’s worth noting that the trade balance for the second quarter as a whole recorded a deficit of USD 1.9 billion, up from USD 1.5 billion a year ago.

“The pressure on the current account deficit is likely to have continued. Overall, we are maintaining our view for a 25bp cut in each of the next two quarters”, added ANZ.