Indonesia Resumes Policy Easing, Reducing Key Rate to 4.5%

  • All but six of 28 economists in survey forecast BI would hold
  • Price pressures have eased while credit growth has slowed

Indonesia’s central bank cut its benchmark interest rate by a quarter percentage point, resuming its policy easing to spur growth in Southeast Asia’s biggest economy.

Governor Agus Martowardojo and his board lowered the seven-day reverse repurchase rate for the first time since October, reducing it to 4.5 percent on Tuesday. All but six of 28 economists surveyed by Bloomberg had expected the benchmark rate would remain unchanged at 4.75 percent.

Bank Indonesia follows counterparts in India and Vietnam in easing monetary policy in recent months as low inflation gives policy makers in Asia room to provide stimulus to their economies. Six interest rate cuts last year in Indonesia have failed to spur economic growth above 5 percent, while credit demand is still lackluster, enabling the central bank to restart its easing cycle.

“The rate cut from BI is a measured move, as it is coming on expectations of lower inflation, and reasonable growth,” said Rahul Bajoria, an economist at Barclays Plc in Singapore, who had correctly predicted the decision. “We believe the central bank remains focused on maintaining financial stability, and any further easing will be done keeping that in mind.”

Martowardojo and other central bank officials told reporters in Jakarta that the rate cut was motivated by lower inflation data, expectations of only one more U.S. interest-rate increase delayed to later this year and projections for the current-account deficit to remain manageable. The policy easing may help to spur credit demand and economic growth, they said.

“The mandate of BI is to maintain stability,” Mirza Adityaswara, senior deputy governor, said. “And we believe by doing so, the growth will be well.”

Bank Indonesia sees inflation averaging about 4 percent this year and below 3.5 percent in 2018, remaining within its 3 percent to 5 percent target band. Inflation slowed to 3.9 percent in July from 4.4 percent in June.

While Indonesia’s economy is growing about 5 percent, that’s still short of President Joko Widodo’s 7 percent goal he set when he came to office three years ago. The government is projecting growth of 5.4 percent next year compared to 5 percent last year.

The central bank said loan growth, which slowed to 7.8 percent in June, will average 8 percent to 10 percent this year, below its previous target of 10 percent to 12 percent. The economy is seen improving, expanding an estimated 5.1 percent to 5.5 percent in 2018, it said.

Bank Indonesia had put its policy easing on hold until today, concerned that tightening U.S. monetary policy may spur outflows from emerging markets, undermining the currency. The rupiah has been relatively stable this year, gaining about 1 percent against the dollar.

“The main reason BI has not cut rates sooner is worries about the outlook for inflation and the exchange rate,” said Gareth Leather, a senior Asia economist at Capital Economics Ltd. in London. “However, these concerns are starting to recede.” He predicts another reduction this year, but said the timing will depend on the performance of the rupiah.

— With assistance by Yudith Ho, Manish Modi, Harry Suhartono, and Kyoji Iwai

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