The Biggest Clue That the World Is Turning Dovish

(Bloomberg Opinion) -- In a week defined by the prospect of fresh monetary stimulus around the globe, the country sending the loudest signal may surprise you: Indonesia.

In the months after the Federal Reserve’s January pause in rate increases, Bank Indonesia remained extremely cautious, weighing low inflation against its bugaboo, the current-account deficit. Now, the central bank is unambiguously hinting that cheaper money is coming. On Thursday, BI cut banks’ reserve ratio by half a percentage point.  

After the Asian financial crisis, massive capital flight and currency turbulence made Indonesian officials uneasy about the prospects of rate cuts. Even now, they dress up their worries in euphemisms, speaking of the need for “stability” – really just a polite way of saying that if they cut too quickly or too deeply, the rupiah will decline sharply. That's a good reason not to expect too many rate reductions once Bank Indonesia gets going, which could be as soon as next month. 

Governor Perry Warjiyo was pretty candid Thursday: It's about when, not if. “Timing and magnitude” are the key now, he said. 

Indonesia followed the Fed consistently and predictably in 2018 to stem a slide in the rupiah. The central bank resisted calls (including by me) to ease the reins after January. That even Warjiyo is now open to easing shows you where the global rate cycle is going: down, down, down.

There’s been a lot of central-bank noise this week. European Central Bank President Mario Draghi pledged chapter two of “whatever it takes” and the Fed encouraged talk of cuts as early as next month. The Reserve Bank of Australia hinted at more steps to follow this month's cut; the Philippines actually followed through with one; the Bank of England sounded somber; and the Bank of Japan kept its ultra-accommodative stance. All this amounts to amplified versions of the status quo. Indonesia, meanwhile, stands out for its new posture.

Is Warjiyo likely to really open the floodgates? Capital Economics now predicts one snip this year, as soon as July. The firm previously expected no change.

Indonesia is Southeast Asia’s largest economy and could be one of the world’s biggest by the middle of the century. It may be just a matter of time before before the influence of its central-bank decisions starts to reflect that stature. 

But you can bet that if rate cuts are coming in Indonesia, the world has turned thoroughly dovish.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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