Bank Indonesia likely to ease monetary policy further

Indonesia is likely to accelerate its easing cycle amid growing global uncertainties, fragile external demand and low inflation. Bank Indonesia in its February meeting cut its policy rate by 25bp to 7.0%. The central bank surprisingly lowered its reserve requirement by 100bp to 6.5%, from 7.5%. This move is likely to boost the lending capacity of the banking system by 34 trillion IDR, when the RRR cut will come into effect from 16 March.

After the RRR adjustment, the central bank has raised its loan growth forecast to 14% from 12% lending facility rate was cut to 7.5% , while deposit facility rates was reduced to 5%.

"We think the accelerated easing increases the likelihood that Indonesia will meet its growth target of 5.4% this year (2015: 4.8%), insulating the economy against falling commodity prices. With inflation stabilizing lower in 2016 at 4.2% with lower oil prices, we see scope for further monetary easing. Indeed, we now look for two additional rate cuts by June. Additionally, we expect BI to cut RRR once more, by 50bp to 6% - to shore up lending capacity as activity accelerates" says Barclays in a research note.