Bank Indonesia cuts rates for first time in nearly 2 years, as expected

19, Jul. 2019

JAKARTA, NNA - Bank Indonesia on Thursday lowered its key interest rate for the first time since September 2017, as expected, in light of slower global economic growth amid the U.S.-China trade dispute.

The central bank also signaled in a statement and official remarks that it would ease further to prop up the economy, which slowed to the lowest growth rate in a year in the January-March quarter due to weaker consumption.

The central bank said on Thursday at the end of a two-day policy meeting that board members had decided to lower the 7-day Reverse Repo Rate by 25 basis points to 5.75 percent. Hours earlier, the Bank of Korea unexpectedly cut its policy rate and slashed its economic growth and inflation forecasts, joining emerging market central banks in easing amid slowing global demand.

Last month, the Indonesian central bank maintained the key interest rate for the seventh time, after raising it to 6 percent in November last year. It also used another policy tool to support economic growth amid lower global demand, requiring lenders to hold fewer cash reserves. After the June meeting, it said it was “considering” a rate cut while monitoring global financial markets and external risks.

Key Points:

―― The rate cut ends the central bank’s tightening cycle, when it raised the key 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 should be less concerned about triggering a sell-off of the rupiah in the currency market.

―― Bank Indonesia said in a statement that the policy is consistent with “low inflation expectations and the need to build economic growth momentum amidst a backdrop of easing global financial market uncertainty and controlled external stability.”

―― The central bank “is maintaining an accommodative macroprudential policy stance to encourage bank lending and expand economic financing.”

Takeaway:

―― Bank Indonesia said it “perceives adequate space for accommodative monetary policy in line with low inflation expectations and the need to further stimulate economic growth,” indicating further easing.

―― Governor Perry Warjiyo told reporters on Thursday that “our monetary policy will be accommodative going forward,” according to press reports. “The accommodative monetary policy could mean that we further ease liquidity, or it could mean bringing down the interest rate,” he was quoted as saying by the Jakarta Post.