Bank Indonesia Cuts Rate for Second Month as Growth Sputters

(Bloomberg) -- Bank Indonesia lowered its key interest rate for a second straight month to bolster economic growth, and signaled further easing will depend on inflation and how the recovery from the coronavirus pandemic unfolds.

The central bank cut its seven-day reverse repurchase rate by 25 basis points to 4%, the lowest since the current rate system was adopted in 2016, as predicted by 18 of 30 economists surveyed by Bloomberg. One expected a 50 basis-point cut, while 11 forecast the bank to hold rates steady.

Bank Indonesia has been one of the more aggressive central banks in Asia, cutting rates four times this year and pledging to buy billions of dollars of government bonds to help finance the budget deficit. The central bank expects the economy to grow just 0.9%-1.9% this year, and inflation has slumped to a two-decade low as the pandemic has crippled businesses and rendered millions of people jobless.

“This decision is consistent with inflation forecasts that remain low, maintained external stability and as a further step to encourage economic recovery in the Covid-19 pandemic,” Governor Perry Warjiyo said in his briefing. “Bank Indonesia, through its policy mix, will continue to strengthen synergies with the government and related authorities so that various policies pursued will be more effective in encouraging economic recovery.”

The rupiah weakened as much as 0.7% before paring losses to end at 14,625 to the dollar, its weakest closing level since May 28, according to data compiled by Bloomberg. The Jakarta Composite Index rose 0.4% to close at 5,098.374, while the yield on benchmark 10-year government bonds fell 4 basis points to 7.033%.

The rate cut may weigh on the rupiah, which has rebounded about 12% against the dollar since hitting a 22-year low in March but has been the worst performer in Asia over the past month. Warjiyo said Thursday the currency has been pressured by global uncertainty, is undervalued and has room to appreciate.

The rupiah “may be susceptible in the near term during bouts of market uncertainty” after Thursday’s cut, said Nicholas Mapa, senior economist at ING Groep NV in Manila. If second-quarter gross domestic product is in line with expectations, “we can expect Warjiyo to focus on rupiah stability” at the August rate meeting.

A spurt in coronavirus cases across the archipelago has clouded the timeline for resuming normal economic activity and weighed on household consumption, which makes up almost 60% of Indonesia’s economy. Warjiyo said on an investor call later Thursday that the economy probably contracted 4% in the March-June quarter.

“The clear implication of today’s cut is that BI remains focused on growth rather than currency risks,” said Joseph Incalcaterra, HSBC’s chief Asean economist in Hong Kong. “We believe a more cautious and gradual pace of rate cuts in the coming quarters can help assuage concerns about currency risks” stemming from the bank’s quantitative easing program.

Watching Inflation

Warjiyo said further cuts will depend on inflationary pressures, but noted that buying bonds and ensuring liquidity can be more effective in reviving the economy.

The central bank has said the outlook for the current-account deficit, a perennial weakness for Indonesia’s economy, is improving, with the country posting a trade surplus of more than $5 billion in the first half of the year and foreign investors being net buyers of government bonds in the past three months. The current-account deficit for the year is expected to be around 1.5% of gross domestic product, Warjiyo said.

Other key points from Warjiyo’s briefing and the investor call:

• The impact of the pandemic appears to have peaked in the second quarter, when the economy contracted, with activity picking up again starting in June
• The pace of recovery in the third quarter will depend on how quickly the government can disburse stimulus and the banking system can restructure debts
• The bank maintained its inflation forecast for the year at 2%-4%, and sees the same range in 2021
• The bank also lowered the deposit facility rate by 25 basis points to 3.25%
• Deputy Governor Dody Budi Waluyo said that as part of Bank Indonesia’s agreement with the government, the central bank will share the interest cost on five-year bonds to help corporates and on seven-year bonds to assist small- and medium-sized enterprises

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