Indonesia's Rate Cut Shows Comfort With Rupiah Outlook

  • Most economists in survey predicted rate to stay unchanged
  • Currency has been relatively stable as Fed risks diminish

Indonesia’s central bank surprised most economists on Tuesday by lowering interest rates, reflecting its relative comfort with the currency and inflation outlook.

The benchmark rate was cut by a quarter point to 4.5 percent, with all but six of the 28 economists surveyed by Bloomberg predicting it would stay on hold. Bank Indonesia reduced borrowing costs six times last year, making it Asia’s biggest rate cutter.

Governor Agus Martowardojo and his board had put policy easing on hold until now, concerned that tightening U.S. monetary policy may spur outflows from emerging markets and undermine the currency. With the Federal Reserve sticking to gradual rate hikes in the face of subdued inflation, the rupiah has been relatively stable this year, gaining about 1 percent against the dollar.

“The central bank probably thinks the financial system is now stronger and the impact of federal fund rate hikes would be marginal or could be managed by improving fundamental conditions in the Indonesian economy,” said Josua Pardede, an economist at PT Bank Permata in Jakarta.

Bank Indonesia said the move was motivated by an improving inflation outlook and expectations of only one more U.S. rate increase, delayed to later this year. Officials also cited the rupiah and current-account deficit remaining “manageable.”

Indonesia follows central banks 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 rate cuts last year in Indonesia had failed to spur economic growth above 5 percent, while credit demand is still lackluster, enabling the central bank to restart its easing cycle.

Bank Indonesia may follow through with more easing. Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd., said the bank may cut once more, while ING Groep NV’s Prakash Sakpal is forecasting a 25 basis-point reduction by the end of 2017 and two more cuts in 2018.

Bloomberg Intelligence’s economist Tamara Henderson is also forecasting more reductions. Mohamed Faiz Nagutha, an economist at Merrill Lynch Asia Pacific Ltd. in Hong Kong, sees no further easing. 

Measured Move

“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.”

The rate cut may spur consumer spending and help to boost sentiment for property and automotive stocks, said Jeffrosenberg Tan, head of strategy at Sinarmas Sekuritas. The Jakarta Composite Index, the nation’s benchmark stock index, rallied 0.6 percent to a record at close on Wednesday, taking its gain this year to almost 12 percent.

The rupiah retreated 0.1 percent to 13,359 per dollar as of 4:27 p.m. in Jakarta. The yield on 10-year government bonds fell two basis points to 6.85 percent, its lowest level since July 6, according to data compiled by Bloomberg.

Click here to read more about risks to Jokowi’s growth target

Other key points from Bank Indonesia’s statement:

  • Inflation forecast to average about 4 percent this year and below 3.5 percent in 2018
  • Forecast for loan growth for this year lowered to 8-10 percent from 10-12 percent previously
  • GDP growth is estimated to be 5.1 percent to 5.5 percent in 2018; President Joko Widodo set a growth goal of 7 percent when he came to office three years ago

— With assistance by Rieka Rahadiana, Eko Listiyorini, Harry Suhartono, and Yudith Ho

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