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Indonesia Monetary Policy October 2019

Indonesia: Bank Indonesia cuts rates for fourth straight month in October

At its 23–24 October monetary policy meeting, Bank Indonesia (BI) lowered the seven-day reverse repo rate from 5.25% to 5.00%, as had been widely expected by market analysts. The Bank also reduced the deposit facility and lending facility rates by 0.25 percentage points each, to 4.25% and 5.75% respectively. Furthermore, the Bank maintained its accommodative macroprudential policy stance, aimed at promoting bank lending and demand for new loans.

The decision to cut rates, the fourth consecutive cut since July 2019, reflected the Bank’s continued efforts to stimulate domestic growth against the backdrop of a softening global economy. Slowing world trade levels—amid increased geopolitical risks and ongoing U.S.-China trade tensions—have weighed on the external sector, as evidenced by merchandise exports falling for 11 consecutive months to September. Furthermore, inflation has been low and stable recently. At 3.4% in September, it currently sits well within BI’s 2.5–4.5% target range and the Bank consequently saw scope to further cut rates.

Looking ahead, BI maintained its dovish tone from the previous meeting, reemphasizing the need for a continuation of accommodative policies amid mild inflation and a sluggish growth outlook. This is broadly in line with our panelists’ expectations, a large number of whom see further cuts between now and the end of 2020. The next monetary policy meeting is set for 20–21 November.

Economists at Nomura see further cuts coming soon, stating that “in terms of timing the next rate cut, we believe it is more likely to be delivered in the November rather than in the December meeting, in response to data releases”. However, they cast doubts on the effectiveness of the rate cuts, commenting: “We remain sceptical of the impact of these rate cuts on growth next year without a significant swing to a more expansionary fiscal stance. If anything, we believe there is a risk that, because of more limited monetary space and a still-precarious external environment, the rate cuts could run the risk of being counter-productive if the currency comes under pressure.”

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