Fourth Rate Cut Is in the Cards for Bank Indonesia

(Bloomberg) -- Fresh off the announcement of a new government in Indonesia, the central bank is poised to cut its benchmark interest rate for a fourth straight month to help bolster Southeast Asia’s largest economy.

Bank Indonesia will probably reduce its key rate by 25 basis points to 5% on Thursday, according to 23 of the 30 economists surveyed by Bloomberg. The rest see no change.

Deputy Governor Dody Budi Waluyo gave a strong signal last week that another rate cut was on the cards, saying policy makers need to support growth.

U.S.-China trade tensions and a worsening global outlook are weighing on Indonesia’s economy. The International Monetary Fund last week forecast the slowest pace of world growth since 2009. The Federal Reserve is also expected to cut interest rates next week, giving central banks in emerging markets more leeway to ease policy without undermining their currencies.

Here’s what to look out for in Thursday’s policy decision:

Growth Outlook

Indonesia’s economy grew at its slowest pace in two years in the second quarter, with U.S.-China trade tensions and weaker global demand continuing to weigh on the outlook. Bank Indonesia has shifted its attention this year to supporting growth with 75 basis points of rate cuts since July.

President Joko Widodo on Tuesday reappointed Sri Mulyani Indrawati as finance minister as he looks to deliver on a pledge to boost growth. Her focus on curbing the budget means more of the stimulus burden may fall on the central bank in the immediate term, said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore.

Indrawati’s return “implies fiscal-policy continuity and should bode well for structural reform prospects,” he said. “That said, in the short term, her reappointment may further support our view of the government adopting a conservative fiscal stance, which would be prudent in the long term but may run the risk of over-burdening monetary policy.”

Nomura has cut its growth forecast for this year to 5% from 5.2%, in line with the IMF’s revised forecast.

Inflation

Inflation continues to be a bright spot: Consumer prices rose 3.39% in September from a year ago, well within Bank Indonesia’s target band of 2.5%-4.5% for this year.

The subdued inflation environment is a key factor supporting the case for further monetary easing.

Waluyo said last week the bank was “able to make another cut as long the risks coming from the global, risks coming from the domestic, will not destroy our target.”

Fed Factor

Indonesia raised rates by 175 basis points last year to counter an emerging-market rout triggered by rising U.S. interest rates. With traders having all but priced in a cut by the Fed at its late-October meeting, Indonesian policy makers may have another reason to lower borrowing costs.

Bank Indonesia Governor Perry Warjiyo said last month -- when policy makers had the benefit of meeting after the Fed -- that the U.S. move had not affected the Indonesian decision. The move was based on a subdued inflation forecast and the need to drive growth, he said.

--With assistance from Tomoko Sato.

To contact the reporter on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold

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