Asia's Biggest Rate Cutter Is Turning Cautious

  • Central bank sees inflation exceeding 4 percent this year
  • Interest rates reduced six times last year to spur growth

Bank Indonesia Headquarters in Jakarta.

Photographer: Dimas Ardian/Bloomberg

Bank Indonesia, Asia’s biggest interest-rate cutter last year, is turning cautious as inflation pressures mount.

After lowering the benchmark rate six times last year to help spur growth in Southeast Asia’s biggest economy, Governor Agus Martowardojo is more circumspect on the outlook for the global economy. He said on Feb. 3 the central bank is monitoring the impact of U.S. fiscal and trade policies, adding that “if previously the stance was an easing bias, now we’re cautious about easing.”

All 19 economists surveyed by Bloomberg predict Bank Indonesia will keep its seven-day reverse repurchase rate at 4.75 percent on Thursday. A separate survey conducted Feb. 8 to Feb. 13 shows analysts are split on whether there’ll be a rate increase or not next year.

“Now that probably the Federal Reserve has signaled that they may raise more than what markets tend to believe, probably BI will be a little bit more cautious about further rate cuts,” said Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore. “There is no good reason for them to cut at all this year. The next move from them, if anything, will be a hike.”

Here are the key points to watch:

Inflation Risks

After a sustained period of relatively low growth in prices, Bank Indonesia is now expecting inflation to exceed 4 percent this year, with risks to February data coming from the adjustment to electricity tariffs, vehicle license fees and fuel costs. The median estimate in a Bloomberg survey of economists is for inflation to average 4.3 percent in 2017, above the midpoint of its 3 percent to 5 percent target.

Charu Chanana, an economist with Forecast Pte Ltd. in Singapore, said inflation pressures and sustained global risks -- primarily from the Fed’s policy stance and rising protectionist measures in the U.S. -- would be key to the central bank’s decision this week.

“Bank Indonesia will now keep rates on hold for a prolonged period of time,” she said.

Loans Recovery

Banks had been slow to boost loans following the central bank’s aggressive easing, but there are signs that’s changing. Credit rose about 10 percent in January from a year earlier and the central bank expects growth of as much as 12 percent through 2017.

“The bulk of the impact from last year’s cuts would be felt early this year and I think it’s starting to shape up quite well for the economy,” Cahyadi said.

Stronger Growth

Indonesia’s economy expanded 5 percent in 2016 and will probably exceed that to reach 5.3 percent this year and 5.5 percent in 2018, according to economists surveyed by Bloomberg.

“Focus now should be on the transmission of 150 basis points of rate cuts announced in 2016,” said Forecast’s Chanana. “The government will have to speed up infrastructure spending -- with the funds it generated from the tax amnesty and by removal of electricity subsidies -- in order to stoke growth.”

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