Indonesia Signals Rate Cut Is Coming as Reserve Ratio Eased
Indonesia Signals Rate Cut Is Coming as It Eases Reserve Ratio
(Bloomberg) -- Indonesia’s central bank signaled it’s ready to cut interest rates in coming months after adding stimulus to the economy by easing reserve limits for banks.
Bank Indonesia left its seven-day reverse repurchase rate at 6% on Thursday, as predicted by 28 out of 35 economists surveyed by Bloomberg. The primary reserve ratio for commercial and Shariah lenders was lowered by 50 basis points from July 1 and is expected to add 25 trillion rupiah ($1.76 billion) in liquidity to the banking system.
Central banks in the region from India to New Zealand have eased monetary policy in recent weeks amid worsening global growth prospects and an escalating U.S-China trade war. The U.S. Federal Reserve also signaled on Wednesday its willingness to cut.
Governor Perry Warjiyo told reporters in Jakarta on Thursday that policy makers will cut rates, but it’s considering “the timing and the magnitude.” Global financial market conditions and Indonesia’s balance of payments were two key factors that would determine a move, he said.
“Bank Indonesia keeps monitoring global financial market conditions and the external stability of Indonesia’s economy in considering a cut in the key policy rate in line with low inflation and the need to push domestic economic growth,” the governor said.
After six interest rate hikes last year, Bank Indonesia is proceeding more cautiously to avoid destabilizing its currency. The rupiah was one of the worst performers last year amid an emerging-market rout, triggered by rising U.S. interest rates and a stronger dollar.
Charu Chanana, an economist at Continuum Economics in Singapore, said it was prudent for the bank to wait given heightened market volatility caused by an escalating U.S.-China trade war.
“Risk appetite is still fragile due to the slowing global growth and current-account deficit concerns, and we believe Bank Indonesia will be very cautious with its moves,” Chanana said. The bank is likely to start easing in the third quarter, with space for 75 basis points of rate cuts over the next year, she said.
What Bloomberg Economists Say
“Bank Indonesia doubled down on its support for growth, cutting the reserve requirement by 50 bps. It may soon be able to add rate cuts to its policy mix. The central bank continues to signal that a rate cut is only a matter of time. We think timing will hinge on the Fed, which is sounding more dovish.”
-- Tamara Henderson, Asean economist
The rupiah has rebounded about 1.9% against the dollar in the past month, while the yield on benchmark 10-year sovereign bonds tumbled more than 50 basis points. A surprise rating upgrade by S&P Global Ratings in May bolstered investor sentiment.
The benchmark Jakarta Composite Index of stocks fell as much as 0.4% after the rate announcement, while the yield on 10-year government bonds pared losses to 7.444%.
Elsewhere in Asia, central banks in the Philippines and Taiwan also held interest rates on Thursday.
Policy makers remain concerned about dimming growth prospects and a widening current account. The central bank sees growth coming in below the midpoint of its 5-5.4% target for this year.
The current account deficit makes Indonesia reliant on foreign inflows and vulnerable to market swings. Warjiyo said the shortfall will probably be in a range of 2.5%-3% of GDP this year.
Inflation remains subdued and is seen staying in the central bank’s target band of 2.5% to 4.5% for this year.
“Changes in the BI rate would be highly dependent on the trajectory of the current account deficit going forward,” said Dian Ayu Yustina, an economist at PT Bank Danamon in Jakarta. The cut in the reserve ratio “gives a strong signal of changes in monetary stance to easing,” she said.
--With assistance from Rieka Rahadiana and Harry Suhartono.
To contact the reporters on this story: Viriya Singgih in Jakarta at vsinggih@bloomberg.net;Tassia Sipahutar in Jakarta at ssipahutar@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
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