Indonesia Cuts Rates, Signals More Easing as Growth Weakens

(Bloomberg) -- Indonesia’s central bank cut its benchmark interest rate for the first time in three months and lowered its growth outlook for the year, days after the government warned of a severe hit to the economy from the coronavirus pandemic.

Bank Indonesia lowered its seven-day reverse repurchase rate by 25 basis points to 4.25% on Thursday, ending a two-month pause. Fifteen of 22 economists in a Bloomberg survey correctly predicted the decision, while the rest saw no change.

“This decision is consistent with efforts to maintain economic stability and encourage national economic recovery amid Covid-19,” central bank Governor Perry Warjiyo said in an online briefing. Going forward, the bank “sees room for lower interest rates in line with low inflationary pressure, maintained external stability” -- including a low current-account deficit -- and the need to support economic growth, he said.

The deteriorating outlook for Southeast Asia’s largest economy has pushed policy makers into action, outweighing concerns about currency volatility. Bank Indonesia lowered its growth forecast for the year to 0.9%-1.9%, from 2.3% previously.

The rupiah reversed earlier losses on the decision, and was almost flat on the day at 14,078 per dollar as of 2:59 p.m. in Jakarta. The country’s benchmark stock index closed down 1.25%.

Open Door

Warjiyo “pulled off a dovish cut, leaving the door open for further easing,” said Nicholas Mapa, a senior economist at ING Groep NV in Manila. While the steadying rupiah opened the door for the bank to lower rates, Indonesia’s economy may not enjoy a similar stability, he said.

The central bank’s move came after the government lowered its own growth outlook this week, projecting the economy will expand 0% to 1% this year -- and warning it could even contract in a worst-case scenario.

Trade data Monday showing imports plunged 42% in May from a year ago, driven by falls in incoming shipments of raw materials and capital goods, added to concerns about the health of the economy. Exports also declined, falling 29%.

At the same time, the outlook for the current account deficit is improving -- it’s expected to narrow to 1.5% this year, Warjiyo said -- and the rupiah has rebounded in recent weeks, giving policy makers scope to cut rates. The currency has gained more than 5% against the dollar in the past month, though Bank Indonesia still considers it undervalued.

The government has made clear its desire to quickly reopen the economy, with restrictions being eased even as Covid-19 infections and deaths continue to rise. Thursday’s rate cut adds to 100 basis points of easing in 2019 and two 25 basis-point cuts earlier this year to support an economy that was slowing even before the virus hit.

“Taking into account today’s move, the real interest rate is relatively thin in comparison with emerging market peers, cautioning any move to utilize room for further easing,” said Wisnu Wardana, an economist at Bank Danamon PT. “We still project another 25 basis-point cut in policy rates this year.”

Other points from the statement and briefing:

• Indicators such as retail sales and investment show the worst of the pandemic blow is over, and activity should pick up in the third quarter
• Bank Indonesia expects the economy to grow 5%-6% next year
• The bank kept its 2020 inflation forecast at 2%-4%
• The deposit facility interest rate and lending facility interest rate were cut by 25 basis points each, to 3.5% and 5% respectively
• While loan demand is low, Warjiyo said there’s ample liquidity in the financial system

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