Indonesia Cuts Rate for Second Month to Counter Virus Blow
Indonesia Cuts Rate for Second Month to Counter Virus Blow
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Indonesia’s central bank cut its benchmark interest rate for a second straight month and slashed its economic growth forecast, joining global policy makers seeking to shore up their economies amid the coronavirus crisis.
Bank Indonesia lowered the seven-day reverse repurchase rate by 25 basis points to 4.50% Thursday, in line with the forecasts of 14 of 26 economists surveyed by Bloomberg. Three predicted a 50 basis-point move and the rest saw no change.
The virus is expected to further weaken Southeast Asia’s biggest economy, with Bank Indonesia now projecting annual growth of 4.2%-4.6% for this year, down from a previous estimate of 5%-5.4%, Governor Perry Warjiyo said. The lower end of the projection would be the slowest expansion since 2003.
The yield on Indonesia’s 10-year government bonds rose 10 basis point after the decision while the rupiah continued its tumble against the dollar, reaching its lowest point since 1998.
Thursday’s cut comes after a spate of central banks, including the U.S. Federal Reserve, slashed rates amid deepening economic fallout from the virus. The Reserve Bank of Australia lowered its benchmark rate by 25 basis points at an emergency meeting Thursday, reaching the limits of conventional policy. The Philippines also slashed its key rate by 50 basis points Thursday, the largest cut since it adopted its current interest-rate framework in 2016.
Cases of Covid-19, the disease caused by the virus, have soared in Indonesia in recent days, accompanied by a spike in deaths. The deteriorating situation has raised concerns about spiraling risks for the economy, which was already hurting amid a slump in tourism and trade, and which now faces possible lock-downs that could further reduce consumer demand.
The latest bout of easing comes after last month’s cut and four reductions last year. The government has announced plans to inject stimulus -- unveiling three emergency packages in the past few weeks, including as much as $1.8 billion in measures Wednesday.
With markets selling off amid the outbreak, the rupiah has plummeted more than 13.7% against the dollar in the past month, making it the worst performer in Asia. That has been a complicating factor for Bank Indonesia as it looks to shield the currency while supporting growth.
“We had thought the extreme rupiah movement would stay policy makers’ hands. But the massive economic slowdown has weighed on their shoulders too much,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “At the end of the day, the degree to which it now expects global and domestic growth to slow down -- revising domestic growth by 0.8 percentage point to as low as 4.2% -- has tipped the balance.”
The virus has prompted worries over food security but inflation so far has remained subdued, coming in at 3% in February compared with a year earlier. Bank Indonesia now expects prices to rise 3% this year, slower than a previous forecast of 3.3%.
The central bank expects a V-shaped recovery once the virus subsides, projecting GDP growth of 5.2%-5.6% in 2021. The pick-up could be aided by a string of reforms President Joko Widodo is seeking to push through parliament, including a cut to the corporate tax rate and an overhaul of labor market rules.
Not everyone applauded Thursday’s move.
“I’m not sure if the decision to cut the policy rate should be part of the policy response in the current environment,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. “Indonesia is facing strong currency pressures and the risk is further rate cuts exacerbate these pressures. Ultimately, a weak currency in my view tends to be negative for growth via confidence channels and investment spending, in particular.”
Warjiyo said Thursday that Bank Indonesia will continue intervening in markets to ensure confidence and liquidity. The bank has room to ease policy further if needed and remains in close contact with the government to coordinate the virus response, Warjiyo said.
The central bank will now conduct briefings with investors and media twice a week, on Tuesdays and Thursdays, Warjiyo said.
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