Indonesia Seen Cutting Rates Again Amid Pandemic

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(Bloomberg) -- Indonesia’s central bank is expected to lower borrowing costs for a third straight month as policy makers take unprecedented steps to bolster the economy amid the coronavirus pandemic.

Bank Indonesia will cut its benchmark rate by 25 basis points Tuesday to 4.25%, according to 18 of 28 economists surveyed by Bloomberg. One economist predicted a 50 basis-point cut, while nine expect no change.

The central bank has reduced the key rate by a cumulative 1.5 percentage points since last year and has said it still sees room for additional easing. But it has also warned that cutting more would present risks for the currency, Asia’s worst performer this year.

The outlook for Southeast Asia’s largest economy has deteriorated rapidly amid a surge in virus cases and deaths. As many as 2.8 million Indonesians have already lost their jobs, according to a report in the Jakarta Post newspaper citing Ministry of Manpower data, while the government has slashed this year’s economic growth forecast to 2.3% from 5.3% previously.

Indonesia Seen Cutting Rates Again Amid Pandemic

Here’s what to look out for in Tuesday’s decision:

Growth Fallout

Bank Indonesia is set to lower its growth forecast further after reducing it to a range of 4.2%-4.6% last month. Governor Perry Warjiyo said last week the central bank wants to prevent growth from deteriorating below the government’s 2.3% forecast.

The government has ramped up its virus response, including boosting disease-detection efforts, allocating more fiscal stimulus and suspending a cap that limited its budget deficit. Nearly 75,000 companies have already shed staff amid the crisis, according to data from the Ministry of Manpower.

“We believe a slowdown in consumption and business investment, along with global recession risks and weak commodity prices, will undoubtedly weigh heavily on 2020 growth,” said Charu Chanana, deputy head of Asia research at Continuum Economics in Singapore. “Recession risks remain as we believe Indonesia is in a long war with Covid-19, and key structural reforms will also be postponed.”

Currency Pressure

The rupiah is down more than 12% against the dollar since the start of the year, weighing on the economy’s outlook. Warjiyo has said guarding the currency is a priority and cited it as a reason to proceed cautiously with further rate cuts. Recently, however, he said pressure on the rupiah has eased and the currency is on course to appreciate to 15,000 per dollar by the end of the year. It traded around 15,630 as of 4 p.m. in Jakarta Monday.

The currency got a boost after the U.S. Federal Reserve agreed two weeks ago to backstop other central banks with dollar swap lines, including providing Indonesia with a $60 billion bond repurchase facility.

Inflation Risks

Consumer prices rose 2.96% in March from a year earlier, and the central bank said last week inflation remains under control. Still, the government is concerned about upward pressures, with President Joko Widodo ordering officials Monday to take stock of supplies across the country and stay on top of production so prices can be maintained and food supply ensured.

©2020 Bloomberg L.P.

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