Photographer: Dimas Ardian/Bloomberg

Indonesia Central Bank Pauses After Four Interest-Rate Cuts

  • Bank has room to ease further as inflation set to slow
  • Limited improvement seen in second-quarter economic growth

Indonesia’s central bank left its benchmark interest rate on hold after four reductions this year, while signaling there’s room for more easing to bolster growth in Southeast Asia’s biggest economy.

Governor Agus Martowardojo and his board kept the reference rate at 6.5 percent on Thursday, as forecast by 10 of 26 economists surveyed by Bloomberg. The rest had predicted a cut of 25 basis points.

With inflation slowing and expected inflows from a tax amnesty set to boost the currency, policy makers may have room to resume rate reductions later this year. Inflation at 3.5 percent is close to the lower end of the bank’s 3 percent to 5 percent target. Juda Agung, executive director of monetary policy, told reporters on Thursday there’s room to lower rates, though the current level is appropriate for now.

“They are still going to ease further this year but I think right now they’re just waiting to see the impact the previous four cuts are going to have,” Charu Chanana, an economist with Forecast Pte Ltd. in Singapore, said by phone. “And of course, they will just wait to see how the tax amnesty is going to work out,”

The Jakarta Composite Index fell on the decision, closing down 0.5 percent after being up as much as 0.5 percent earlier. The rupiah strengthened 0.1 percent to 13,100 a dollar, prices from local banks show, and the yield on the nation’s five-year sovereign bonds dropped four basis points to 6.84 percent, according to the Inter Dealer Market Association.

“By considering the assessments, both macro and global, so far we see that the room for easing still exists going forward,” the central bank’s Agung said. “But for now, the stance is supportive and appropriate.”

Most economists had predicted the bank will cut interest rates on Thursday after the parliament passed a law last month allowing individuals to declare and repatriate previously unreported assets held abroad. The central bank estimates the tax amnesty will result in 560 trillion rupiah ($43 billion) of inflows, helping to strengthen the currency and ease pressure on inflation.

“I was expecting a decision to cut, given the external backdrop but also the favorable data,” said Euben Paracuelles, an economist at Nomura Singapore Ltd. “They have room to cut further given that inflation I think is going to be well within their target and that growth seems to be where they’re focusing right now.”

Growth Outlook

Bank Indonesia said exports have remained weak and it’s likely there will be limited improvement in economic growth in the second quarter. The bank is forecasting expansion of 5 percent to 5.4 percent in 2016.

Gundy Cahyadi, a Singapore-based economist with DBS Group Holdings Ltd., said the central bank may be shifting into a “cautious mode” in which it prefers to assess developments before any future move. The bank cited the possibility of tighter monetary policy in the U.S. as a reason to hold for now.

“Bank Indonesia has already done quite a lot, monetary policy is very accomodative at this point,” he said.

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