Bank Indonesia Set to Hit Pause After Four Cuts: Decision Guide

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Indonesia’s central bank is expected to hit the pause button after four straight interest-rate cuts, as policy makers use additional instruments to help stoke growth in Southeast Asia’s largest economy.

With the U.S. Federal Reserve expected to be on a prolonged hold after three rate cuts this year, central banks in emerging markets are getting some breathing space. Twenty-one of the 31 economists surveyed by Bloomberg predict Bank Indonesia will leave its key rate unchanged at 5% on Thursday, while the rest forecast a 25 basis-point cut.

“We believe BI has been pre-emptive in easing and would now prefer to wait and watch the pass-through,” said Charu Chanana, an economist at Continuum Economics in Singapore. “Further macroprudential accommodation is also scheduled to go into effect in December, and fiscal room is also being created by relaxing the fiscal targets.”

Here’s what to look out for in Thursday’s policy decision:

Growth Outlook

Indonesia’s economy grew at its slowest pace in more than two years in the third quarter, with a global downturn and the U.S.-China trade war taking a toll. The central bank last month forecast growth to slow to 5.05% this year.

Trade data last week showed exports declined for a 12th straight month in October, while imports of capital goods plunged, underscoring the weakness in the economy. Speaking shortly after last month’s policy meeting, Governor Perry Warjiyo said Bank Indonesia now has a “more pessimistic view” of the economy, although he stressed the need to use policy levers other than interest rates to support growth.

Government revenue has been hit hard, and rather than cutting spending, Finance Minister Sri Mulyani Indrawati is raising the fiscal deficit target, providing support to the economy and giving the central bank some breathing room.

Fed On Hold

Indonesia raised interest rates by 175 basis points last year to defend a currency under the pump amid an emerging-market rout triggered by higher U.S. borrowing costs. Bank Indonesia has reversed more than half of those hikes, cutting rates by 100 basis points since July amid a global easing cycle.

Fed chairman Jerome Powell has signaled U.S. officials have probably done enough to keep the American economy’s expansion on track. With the Fed likely on hold, Indonesian policy makers may have more reason to pause too.

Inflation

Indonesia’s subdued inflation environment remains a key factor in providing room for further easing. Consumer prices rose 3.1% in October from a year ago, the slowest pace of growth since April, remaining well within the central bank’s target band of 2.5%-4.5% for this year.

Bank Indonesia sees inflation moderating even further in the year ahead, and is planning to lower its target band next year to 2%-4%.

To contact the reporter on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold

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