Indonesia Rate Cuts May Be in the Pipeline in Wake of Jokowi’s Victory

(Bloomberg) -- With Indonesian President Joko Widodo making a renewed effort to boost economic growth as he prepares for a second term in office, the central bank may soon be able to play its part with interest-rate cuts.

Economists are bringing forward their calls for monetary policy easing after unofficial results from last week’s presidential election put Jokowi -- as Widodo is known -- comfortably in the lead. That allows for policy continuity and for Jokowi to push ahead with his ambitious infrastructure program.

Bank Indonesia Governor Perry Warjiyo has been sounding a cautious tone on the possibility of rate cuts, and only one of the 30 economists surveyed by Bloomberg sees a change on Thursday. Still, with inflation subdued and the currency stabilizing after last year’s emerging-market rout, there is growing support for the view that policy makers now have ample room to consider easing later this year, and as early as this quarter.

“A Jokowi victory could lead to a resumption of inflows, adding to favorable local and global factors,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. “We think the scope for rate cuts this year by Bank Indonesia has increased.” He predicts 50 basis points of easing in the fourth quarter after previously forecasting rate cuts to begin next year.

The president is expected to be confirmed as having won a second five-year term when official results from the April 17 election are announced in the next few weeks. He is leading by about 10 percentage points over Prabowo Subianto in official counting, with about 30 percent of votes from more than 800,000 polling stations tallied, mirroring unofficial results by private pollsters last week.

Growth Target

With the election out of the way, the government is now framing its next budget and is targeting a growth rate of as much as 5.6 percent next year. While that would still be short of the 7 percent goal set by Jokowi ahead of his first term, it would be the fastest pace since 2013 and eclipse the 5.3 percent forecast this year.

Inflation has been trending down and reached an almost decade-low of 2.48 percent last month, below the central bank’s target band. Consumer prices next year are seen in a range of 2 percent to 4 percent next year, the government said on Tuesday.

After raising interest rates six times last year to stabilize the currency amid a sell-off, Indonesia’s central bank has kept its key rate unchanged at 6 percent. With the U.S. Federal Reserve putting further rate hikes on hold and the rupiah on more solid ground, Bank Indonesia has softened its hawkish rhetoric. Although not ready to signal any easing, Warjiyo has been more upbeat, pointing to a narrowing current account deficit, and portfolio inflows.

Positive Developments

“It is true that various indicators show positive development,” Warjiyo told reporters on Tuesday. But he reiterated the central bank’s monetary policy is anchored to ensure external stability of the economy, particularly to control the current account deficit, and to maintain attractiveness of domestic financial assets to investors.

Bank of America Merrill Lynch expects the central bank to cut interest rates as early as this quarter now that the elections are out of the way. “We expect BI to stay on hold in the meeting immediately following the elections and commence a mini easing cycle of 75 basis points over June-August,” BofAML said in a note published April 19.

Morgan Stanley too expects easing global financial conditions as well as favorable domestic macro conditions to allow Bank Indonesia to unwind its earlier rate hikes. The bank is predicting a 75 basis points cut in the third quarter in view of a more dovish Fed, a weaker dollar, low domestic inflation and a narrowing current account deficit, Morgan Stanley economists said in a note on April 17.

The rupiah has gained about 2 percent against the dollar this year, while investors have pumped $3.95 billion into government bonds since the start of January.

To contact the reporters on this story: 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, Karthikeyan Sundaram

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