Indonesia Under Pressure to Cut Rates Again: Decision Guide

(Bloomberg) -- Indonesia’s central bank will face another tight interest rate decision Thursday, with a majority of economists expecting more easing to help revive economic growth.

Bank Indonesia will lower its benchmark interest rate Thursday to 4%, its second straight 25 basis-point cut, according to 18 of 30 economists surveyed by Bloomberg. Eleven economists expect rates to stay on hold, while one expects a 50 basis-point cut.

The decision comes as Southeast Asia’s largest economy faces a struggle just to eke out positive growth amid the coronavirus pandemic, which has decimated global demand and dealt a blow to Indonesia’s normally hearty domestic consumption. With stimulus spending expected to push the fiscal deficit to 6.34% of gross domestic product this year, Bank Indonesia last week committed to purchase billions of dollars worth of sovereign bonds to share the burden of virus relief.

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

Inflation Falling

Consumer prices in Southeast Asia’s largest economy slumped to 1.96% in June from a year earlier, the lowest rate since 2000 and slightly below the central bank’s target of 2%-4%.

“Both very low inflation and core inflation show that demand is still very sluggish from the impact of the pandemic, and Bank Indonesia needs to continue easing its policy rate to pick it up,” said Josua Pardede, an economist at PT Bank Permata in Jakarta.

Further monetary easing, combined with faster disbursement of government stimulus, is needed to strengthen purchasing power, he said.

Growth Recovery

Indonesia’s economy is believed to have bottomed out in the second quarter and is expected to start recovering in the third and fourth quarters, following the resumption of economic activity in strategic sectors and the easing of mobility restrictions imposed to contain the virus.

Tax revenue has been improving since June, boosting confidence that “we will still be able to reach economic growth at near zero or even positive this year, in line with our outlook in the range of -0.4% to 1%,” Finance Minister Sri Mulyani Indrawati said last week.

Steady Rupiah

Indonesia’s currency has rebounded around 12% since hitting a 22-year low in March, as outflows from local currency bonds eased.

“The rupiah has been quite steady lately and needs to be maintained so, considering the high uncertainty of external conditions,” said David Sumual, chief economist at PT Bank Central Asia.

Global funds recorded inflows into Indonesian sovereign bonds for three straight days last week, showing that foreign investors are attracted by the country’s real yields. The differential between the yield on 10-year Indonesian government bonds and inflation was around 512 basis points last week, higher than last year’s average real yield of 466 basis points, Anthony Kevin, an economist at Mirae Asset Sekuritas Indonesia, wrote in a report.

The relatively wide gap should allow the central bank to cut benchmark rates further, as investors consider Indonesia “still attractive compared to other emerging markets,” Kevin said.

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