Indonesia: Bank Indonesia lowers interest rates
September 22, 2016
At its 21–22 September monetary policy meeting, Bank Indonesia decided to cut the BI seven-day Reverse Repo rate (BI seven-day RR rate) from 5.25% to 5.00%. The BI seven-day RR rate became Bank Indonesia’s main policy instrument as of 19 August, replacing the former BI rate. The move was in line with market expectations. In addition, the Bank decided to cut the lending facility rate and the deposit facility rate by 25 basis points each to 5.75% and 4.50%, respectively.
Inflation fell to an over-six-year low in August which, along with a contained current account deficit and the relative stability in the rupiah, gave the Central Bank space to ease monetary conditions. In its accompanying statement, the Bank remarked that the move was designed to boost domestic demand and preserve the economy’s growth momentum. Government stimulus is expected to be limited in H2 and, despite some price gains in certain commodities, low volumes of global trade are expected to hurt exports. Consequently, the Bank sees the economy growing 4.9% to 5.3% this year.
The statement was devoid of strong forward guidance, although officials struck a dovish tone in the accompanying press briefing. The Bank sees inflation coming in at the floor of its target corridor of 4% plus or minus 1.0 percentage point in 2016. Consequently, Weiwen Ng, Economist at ANZ, comments:
“Even after [the] rate cut, we expect an easing bias to be maintained. Monetary easing needs to be on the front burner with tax amnesty inflows tracking below target. […] Any tax amnesty revenue shortfall will need to be offset by reduced expenditure to prevent the fiscal deficit from rising. […] This will slow public spending growth, and exacerbate the current weakness in domestic conditions. Already, private sector investment and household consumption – the crucial ingredients to the economic outlook – are waning.”