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Indonesia Monetary Policy September 2019

Indonesia: Bank Indonesia chops rates for the third time in three months in September

At its 18–19 September monetary policy meeting, Bank Indonesia (BI) lowered the seven-day reverse repo rate from 5.50% to 5.25%. The decision, which was expected by market analysts, marked the third consecutive cut since July. The Bank also reduced the deposit facility and lending facility rates by 25 basis points each, to 4.50% and 6.00% respectively. Moreover, BI also decided to relax macroprudential policies with the objective to increase banks’ lending capacity and demand for new loans. Notably, the Bank relaxed the rules for some property and vehicle loans.

The decision to cut rates further reflects the Bank’s desire to lift sluggish domestic growth amid a deepening global slowdown. Uncertainty in global financial markets amid increased geopolitical risks and U.S.-China trade tensions have weighed on the Indonesian economy. The external sector, in particular, has been hit by weak global demand and falling commodity prices, as reflected by merchandise exports falling for 10 consecutive months up to August. On the price front, inflation is stable and expected to fall below the midpoint of the target range by year-end, while yields on domestic financial assets remain attractive.

Looking ahead, BI maintained its dovish tone from the previous meeting, reemphasizing the need for a continuation of accommodative policies amid low inflation expectations and a sluggish growth outlook. That said, the current account deficit still remains a concern as it is vulnerable to capital outflows in times of instability, which could limit further rate cuts, although a recent trade surplus registered in August suggests it could be stabilizing.

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