Indonesia Surprises With Second Rate Cut to Support Growth

(Bloomberg) --

Indonesia unexpectedly cut interest rates for a second straight month to spur an economy facing increasing risks from a global slowdown and intensifying trade war.

Bank Indonesia lowered its seven-day reverse repurchase rate by 25 basis points to 5.5% on Thursday, a move predicted by only 13 of the 34 economists surveyed by Bloomberg. The majority expected the bank to keep policy unchanged after it lowered rates for the first time in almost two years in July.

Governor Perry Warjiyo said the rate cut was consistent with the bank’s low inflation forecast and serves as a “preemptive measure to push economic growth momentum in the future.” The move also retains the attractive yield on domestic assets, he said.

Indonesia Surprises With Second Rate Cut to Support Growth

Indonesia is using a mix of monetary and fiscal policy to stimulate Southeast Asia’s biggest economy after growth slowed to a two-year low in the second quarter. Low inflation and the Federal Reserve’s dovish policy outlook is giving Bank Indonesia room to reverse some of last year’s rate hikes.

“Indonesia is lucky with its continuing economic growth momentum, but we must take anticipative, preemptive steps in facing the risks of a slowing global economy,” Warjiyo said.

Central banks in emerging markets like India, Brazil and Russia -- and, closer to home, Thailand, Malaysia and the Philippines -- have all cut rates this year to reignite growth.

Key Highlights from the Policy Statement
  • 2019 GDP growth seen below 5.2%; 2020 growth forecast at 5.1%-5.5%
  • CPI seen below midpoint of 2.5%-4.5% target in 2019
  • Current account deficit seen at 2.5%-3% in 2019, 2020
  • Loan growth forecast at 10%-12% this year, 11%-13% in 2020

The Jakarta Composite Index rebounded immediately after the rate cut, but was down 0.2% at its close. The rupiah gained 0.1% against the dollar, while the yield on the 10-year benchmark rupiah bonds was down 4 basis points.

Warjiyo said the central bank will “continue its accommodative policy mix.” It sees growth for this year below the government’s projection of 5.2%, while inflation -- which reached 3.32% in July --will probably come in below the midpoint of the 2.5% to 4.5% target band.

“It seems that growth worries have taken on a greater urgency,” said Eugene Leow, a fixed income strategist at DBS Group Holdings Ltd. “And with many central banks across the world easing, BI probably felt comfortable enough to follow suit.”

Indonesia’s rate cut complements President Joko Widodo’s plans -- outlined in his budget last week -- to boost growth to 5.3% next year through record spending of $178 billion and tax incentives to businesses. The economy grew 5.05% in the second quarter, a far cry from the 7% growth the president targeted in his first term.

What Bloomberg’s Economists Say

Bank Indonesia shifted its policy stance to one that pre-emptively supports growth. This suggests a willingness to cut rates more aggressively, in our view. Ability to follow through, though, is likely to hinge on risk appetite which affects the currency and capital flow.

Click here to read the full report.

-- Tamara Mast Henderson, Asean economist

Most economists predicted the central bank would keep rates on hold this month given heightened market turmoil and a widening in the current account deficit to 3% of gross domestic product. The rupiah has slumped about 2% against the dollar in the past month, though it’s still among a handful of gainers in Asia this year.

Economists see more rate cuts in coming months, but probably at a gradual pace. HSBC Holdings Plc sees a pause in September and another reduction in the fourth quarter.

“The central bank has clearly become more concerned about growth risks in recent weeks, and relatively less concerned about financial stability risks due to an improvement in capital flows,” said Joseph Incalcaterra, an Asean economist at HSBC in Hong Kong. “That said, this will still be a gradual easing cycle by historical standards due to a relatively high current account deficit.”

©2019 Bloomberg L.P.

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