Indonesia Expected to Deliver Third Rate Cut: Decision Guide
(Bloomberg) -- Indonesia’s central bank is under pressure to cut interest rates for a third straight month as a deteriorating global economy threatens domestic growth.
Most economists see the need for another shot of stimulus when Bank Indonesia policy makers meet Thursday. With a deepening slowdown in China and trade tensions weighing on Southeast Asia’s largest economy, concerns over oil supplies and higher crude prices further complicate the bank’s decision.
In addition, another rate cut overnight from the Federal Reserve adds to the pressure on Bank Indonesia Governor Perry Warjiyo and his board to keep pace with U.S. policy makers. Of the 28 economists surveyed by Bloomberg, 21 are predicting Bank Indonesia will lower its benchmark interest rate to 5.25%, while the rest see no change.
Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore, said he is “still calling for a cut” but will watch oil prices closely. BofAML sees Bank Indonesia cutting its policy rate by 25 basis points Thursday, and another 50 basis points by early next year.
“The sharp increase in oil prices, if sustained, would impact Indonesia’s current account negatively and also have potential implications for monetary policy,” he said. “For now, we don’t think this will be the case.”
Here’s what to look out for in Thursday’s policy decision:
An attack on a Saudi Arabian oil facility that has sent crude futures surging is set to sap business and consumer confidence and hamper growth prospects for the global economy.
With Indonesian policy makers already concerned about geopolitical flash points, the Saudi oil shock looms as another complicating factor. Indonesia’s current account deficit makes it sensitive to instability that can spark capital outflows.
“It is a point to be noted and warrants continuous monitoring, including by the Indonesian monetary authority,” Enrico Tanuwidjaja, head of economics and research for PT UOB Indonesia in Jakarta, said of the spike in oil prices. “It depends on how long this output disruption is going to last.”
Indonesia’s economy has been struggling to grow above 5% for several years. Finance Minister Sri Mulyani Indrawati, having revised down her growth forecast for this year to 5.1% from 5.3%, has made it clear she sees room for more monetary policy easing.
Bank Indonesia has signaled more easing in the pipeline. Deputy Governor Dody Budi Waluyo, speaking Sept. 4, also flagged the possibility of adjustments to macroprudential policy to boost liquidity and encourage banks to keep lending.
“Amid the ongoing external, global pressure, we see that room for rate cuts is open,” Waluyo said.
Consumer price growth has been accelerating, with inflation rising 3.49% in August compared to a year earlier, the fastest pace since December 2017. Yet inflation remains low by Indonesian standards and well within the central bank’s target band of 2.5% to 4.5%.
Exports continued going backward in August, the 10th straight month of contraction. Indonesia still managed to eke out a small trade surplus of $85 million.
“From a monetary policy perspective, what matters most is that we continue to see an overall improvement in the balance of payments,” said Joseph Incalcaterra, an Asean economist at HSBC in Hong Kong. “Thanks to a better trade balance and more stable portfolio inflows, this appears to be occurring, allowing BI to focus on growth concerns over rupiah risks.”
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