Bank Indonesia Holds Key Rate, Leaves Door Ajar for Future Cuts
Bank Indonesia Keeps Interest Rate Unchanged for Third Month
(Bloomberg) --
Indonesia’s central bank left its benchmark interest rate unchanged for a third straight month, saying the economic outlook is improving even as the door remains open for future rate cuts.
Bank Indonesia kept the seven-day reverse repurchase rate unchanged at 5% Thursday, as predicted by 29 of 34 economists surveyed by Bloomberg. The others expected a reduction of 25 basis points.
“Is there room to cut rates? Yes. Will Bank Indonesia use it? Not yet,” Governor Perry Warjiyo told reporters after the decision.
A spike in risk appetite, boosted by a phase-one trade deal struck by the U.S. and China, has been driving inflows into emerging markets, spurring on Indonesia’s currency and pushing bond yields lower. That takes the pressure off policy makers to act, although Warjiyo stressed policy will remain accommodative.
“Today’s decision can best be described as a dovish hold,” said Joseph Incalcaterra, Asean economist at HSBC Holdings Plc. “While the central bank took comfort in the fact that the latest global and domestic data all point to improving growth, BI clearly signaled room for further rate cuts. Given that we forecast growth to remain below Bank Indonesia’s 5.1%-5.5% target in the short-term, we see a further 50 basis points of rate cuts this year.”
The rupiah has gained 2.5% against the dollar over the past month, making it Asia’s top performer. Foreign investors have pumped more than $1.5 billion into Indonesian government bonds so far this year.
The currency pared gains after the decision, while the Jakarta Composite Index was little changed. Indonesia’s 10-year government bonds were headed for a sixth day of gains.
Emerging markets from Argentina to Malaysia have kicked off the year with rate cuts to bolster their economies amid an uncertain global backdrop. Bank Negara Malaysia unexpectedly reduced its benchmark rate by 25 basis points Wednesday in what it said was a pre-emptive move.
In Indonesia, growth of about 5% remains a worry for policy makers. In a briefing for Thursday’s rate decision, Bank Indonesia officials said the economy had already bottomed out and would grow around 5.3% this year, after an estimated 5.1% expansion last year.
Lagging Lending
In his briefing, Warjiyo raised concerns about lackluster loan growth -- estimated at just 6.1% in 2019 -- as well as the pace of intermediary functions in the banking sector. Even the 10%-12% loan growth expected this year “is not yet optimal,” Warjiyo said.
“It’s time to invest. It’s time to be confident,” he said at the end of his remarks.
“It looks like they’re still hoping banks would start to pass on the 100 basis points in rate cuts from last year, although the loan-growth target of 10%-12% for 2020 will remain ambitious,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “Overall, BI is trying to strike a confident tone on growth, talking about lower uncertainty globally and higher investment domestically.”
Inflation is slowing, giving the central bank room to lower borrowing costs in coming months if further stimulus is needed. Consumer prices rose 2.7% in December from a year ago, the slowest pace of growth since March. Bank Indonesia has lowered its inflation target band to 2%-4% this year, from 2.5%-4.5% in 2019.
The current-account deficit remains a risk for the economy, although the trade deficit improved significantly to $3.2 billion last year from $8.6 billion in 2018.
Warjiyo sought to calm fears over the appreciating rupiah. President Joko Widodo recently expressed concern about the currency gaining too quickly, warning it could hurt exporters.
“Overall, the impact of rupiah appreciation is positive,” the governor said. “It will help with imports of raw materials for investment.”
--With assistance from Rieka Rahadiana, Eko Listiyorini and Chester Yung.
To contact the reporters on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net;Tassia Sipahutar in Jakarta at ssipahutar@bloomberg.net;Arys Aditya in Jakarta at aaditya5@bloomberg.net
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold
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