Bank Indonesia keeps rate but signals easing amid slow global demand

21, Jun. 2019

JAKARTA, NNA – Bank Indonesia left its key lending rate unchanged on Thursday but used another policy tool to support economic growth amid lower global demand, requiring lenders to hold less cash in reserves.

The central bank sent a clear message to market participants through a post-meeting statement, saying it is “considering” a rate cut while monitoring global financial markets and external risks.

The bank maintained the key interest rate for the seventh time at its latest policy meeting that ended Thursday, after raising it to 6 percent in November last year. In its tightening cycle, the bank raised the rate by a total of 175 basis points from 4.25 percent to stem the flow of funds out of the emerging economy to U.S. dollar assets.

But now that the Federal Reserve appears ready to ease after shifting its stance from tightening to neutral earlier this year, Indonesia would be less concerned about triggering a sell-off of the rupiah in the currency market if it were to follow the lead of a Fed rate cut.

Key points:

―― Bank Indonesia’s policy board agreed to hold the seven-day reverse repurchase rate at 6 percent.

―― At the same time, it also decided to lower the rupiah reserve requirement for conventional and Islamic banks by 50 basis points to 6.0 percent and 4.5 percent respectively, with the average reserve requirements remaining at 3.0 percent, effective July 1.

―― The bank said in a statement it was keeping a close watch on global financial markets and external risks to domestic growth “when considering reductions to the policy rate in line with low inflation and the current need to stimulate domestic economic growth.”

―― Last month, the bank had said it was monitoring the markets and risks “with due consideration to the space available for accommodative monetary policy in line with low inflation and the need to stimulate domestic economic growth.”

―― On Thursday, the bank also said it would “maintain an accommodative macroprudential policy stance to catalyze bank lending and expand economic financing.”

Takeaway:

―― Bank Indonesia is expected by economists to follow in the footsteps of the U.S. Federal Reserve, as it often does, waiting until the Fed eases before cutting its own rate. But it is likely to be careful if the rupiah becomes volatile in the currency market.

―― BI is keeping its forecast that inflation this year will be below the midpoint of its target range of 2.5 percent to 4.5 percent. Indonesia’s annual rate of inflation in May accelerated at 3.32 percent, the fastest pace in more than a year, but it was largely due to a temporary factor – the usual rise in spending on food, clothing and traveling during the month of Ramadan.