- Majority of economists predict a 25 basis-point reduction
- Central bank may also consider lower reserve ratio for banks
Bank Indonesia may find room to add to four interest-rate cuts this year as an expected tax amnesty windfall helps to spur the currency and ease inflation pressures.
A majority of economists surveyed by Bloomberg predict policy makers in Southeast Asia’s largest economy may move as early as Thursday to lower rates after a surprise reduction last month took the benchmark rate to 6.5 percent. Authorities have been pushing aggressively this year to spur lending and offset a slowdown in growth triggered by falling commodity prices.
Of the 26 economists surveyed by Bloomberg, 16 predict a 25 basis-point reduction in the reference rate to 6.25 percent, while the rest forecast it will remain unchanged. Even if Governor Agus Martowardojo holds the rate, there’s a chance of further easing this year, said economists, including Charlie Lay of Commerzbank AG.
Policy makers have signaled their openness to ease further after parliament passed a tax amnesty law last month that the central bank says will result in 560 trillion rupiah ($43 billion) of inflows. Days after June’s rate cut, Bank Indonesia’s Deputy Governor Perry Warjiyo told reporters as much, saying the inflows may lead to a stronger currency.
The rupiah has gained 0.9 percent since the parliament passed a bill on June 28 that allows individuals to declare and repatriate previously unreported assets held abroad. The currency is up 5.2 percent this year after finishing as the second-worst performer in Asia last year.
The central bank estimates the tax amnesty will add 53 trillion rupiah to government revenue in coming months, with the effect of the program visible as early as August or September, as individuals start to repatriate funds.
The stronger rupiah will curb import prices and help to slow inflation. Consumer prices rose 3.45 percent in June from a year ago, near the lowest level in more than six years. The bank has an inflation target of 3 percent to 5 percent for this year.
“This is too good an opportunity for Bank Indonesia to pass given that inflation in the run-up to Ramadan has been more benign than expected,” Euben Paracuelles, a Singapore-based economist with Nomura Singapore Ltd., said by phone. “You’ve also got the trade surplus widening and the external backdrop even after post-Brexit seems to be calmer. All of these things form a good backdrop for them to cut again.”
Interest rates aren’t the only tool available to Bank Indonesia, which is on track to switch to a new benchmark rate next month -- the seven-day reverse repo rate, currently at 5.25 percent.
David Sumual, an economist at PT Bank Central Asia in Jakarta, said he expects Bank Indonesia to hold the benchmark rate, but also consider other monetary policy levers such as reducing the reserve requirement ratio for commercial banks. The ratio currently stands at 6.5 percent.
The central bank has kept this ratio unchanged since February, which opens up the door for an adjustment, according to Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. Bank Indonesia may cut the benchmark rate this quarter and not at Thursday’s meeting, she said by e-mail.
“We feel that Bank Indonesia may not rush into another cut again in July since the monetary easing has not been effective in boosting the economy so far,” Ho said.