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Indonesia Pledges More Rate Cuts as It Moves to Spur Growth

Indonesia Follows South Korea With Rate Cut, Pledges More Easing

(Bloomberg) -- Indonesia’s central bank cut its benchmark interest rate for the first time in almost two years and pledged more easing to come as it shifts focus to supporting growth in Southeast Asia’s biggest economy.

The seven-day reverse repurchase rate was lowered by 25 basis points to 5.75% on Thursday, in line with the forecasts of most economists surveyed by Bloomberg.

The decision came hours after a similar move from South Korea’s central bank and after dovish signals from the Federal Reserve that it will cut interest rates for the first time in a decade in July. It underscores central bankers’ concerns about a worsening global economy and mounting trade tensions.

“Bank Indonesia sees that the room is still open for accomodative monetary policy that is in line with the low inflation estimate and the need to push economic growth momentum further,” Governor Perry Warjiyo said in Jakarta.

Indonesia Pledges More Rate Cuts as It Moves to Spur Growth

After raising interest rates by 175 basis points in 2018 to stem an emerging-market rout, Bank Indonesia has proceeded cautiously this year to avoid destabilizing the currency. With the rupiah gaining this year and concerns about the current-account deficit moderating, Warjiyo is turning his attention to spurring growth.

Weaker global demand and a fallout from the U.S.-China trade war are increasingly weighing on Indonesia’s prospects. The government has trimmed growth forecasts for this year, while the central bank expects the expansion will probably be below the midpoint of its 5% to 5.4% forecast range.

Warjiyo said a prolonged trade war would mean “downside risks” to the bank’s forecast for growth next year of 5.1% to 5.5%. “With this interest rate cut, all of Bank Indonesia’s policies are indeed aimed at maintaining economic growth momentum,” he said.

Bank Indonesia’s first cut since September 2017 may just be the beginning of an easing cycle that could push the benchmark rate down to 5% by the end of the year, according to Morgan Stanley. Still, there’s reason for the central bank to tread more cautiously given Indonesia’s reliance on foreign inflows to fund the current account deficit.

Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore, said this is probably a “mini easing cycle” with more rate cuts to come given low inflation.

“We see more for sure,” he said, forecasting 75 basis points of easing this year including today’s move. “It was always a matter of time, not if.”

What Bloomberg Economists Say

“Bank Indonesia signaled more easing to come, but we don’t expect a back-to-back move as soon as August. Unless the Fed manages its forward guidance well -- or global trade tensions abate -- global sentiment could suffer and temper capital inflows. This suggests it will be careful to avoid reducing its interest rate differential too quickly.”

-- Tamara Henderson, Asean economist

The rupiah pared gains to 0.2% after the decision while the benchmark Jakarta Composite Index of stocks rose 0.1%, snapping two days of losses. The yield on 10-year government bonds fell 1 basis point to 7.13%.

Price pressures remain subdued, giving policy makers room to move. While core inflation accelerated to its highest level in more than two years in June, the headline measure is well within the central bank’s target band of 2.5% to 4.5%.

Warjiyo said inflation will be low for the rest of the year, forecasting it below the midpoint of the 2.5%-4.5% target.

“The statement only seemed marginally dovish than before, which again speaks of BI keeping a close watch on external risks and the top priority of its objective of maintaining stability,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore.

--With assistance from Yoga Rusmana and Rieka Rahadiana.

To contact the reporters on this story: Tassia Sipahutar in Jakarta at ssipahutar@bloomberg.net;Viriya Singgih in Jakarta at vsinggih@bloomberg.net;Karlis Salna in Jakarta at ksalna@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net;Thomas Kutty Abraham at tabraham4@bloomberg.net

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